Federal Reserve policymakers announced Wednesday that they would buy $400 billion of longer-term U.S. Treasury securities to put downward pressure on longer-term interest rates and “help make broader financial conditions more accommodative.”
Commonly known as “Operation Twist,” the Fed’s goal is to bend the yield curve to keep interest rates lower and thus encourage more job creation for the ailing U.S. economy. Analysts had anticipated such a move from the Fed as rates remain low and policymakers have fewer monetary policy tools to use.
In the Federal Open Market Committee’s announcement, the policymakers specified that by the end of June 2012, the FOMC intends to purchase $400 billion of Treasury securities with remaining maturities of six years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of three years or less.
Ian Shepherdson, chief U.S. economist for High Frequency Economics Ltd., in Valhalla, N.Y., said in an analyst’s note that the attempt to flatten the curve has been triggered by significant downside risks, including strains in global markets, while inflation is expected to settle soon despite the recent surge in core prices.
However, Shepherdson was skeptical that Fed Chairman Ben Bernanke or his policy-making board can have much effect on the economy at this point.
“We expect the Fed’s actions to have very little visible effect on the economy, because the level of interest rates and the shape of the curve are not the key constraints on growth. Mr. Bernanke wants to be seen to be doing something, but his hand is not on the fiscal policy lever,” Shepherdson said.