Fed Engages in $400 Billion of ‘Operation Twist’, Asset Debasement

Sep 2011

Fed Engages in $400 Billion of ‘Operation Twist’, Asset Debasement

In today’s monetary policy release, expectations were met by policy makers for a new program called ‘Operation Twist’ which involves the Federal Reserve selling their short term assets and replacing them with longer term, riskier assets. Long term bond rates have fallen in anticipation of this policy move and is largely priced into markets. By conducting such a policy, the Fed is pursuing a qualitative easing of their assets, in effect replacing safer holdings with ones of greater liquidity and duration risk.

The Fed chose not to lower their target rate or the language surrounding it and also decided to reinvest their maturing agency debt and mortgage backed securities into agency mortgage backed securities instead of just Treasury bonds as they have been doing so far. For the second meeting in a row three voting members dissented.

The effect of this policy on metals and commodities in general will be positive over time as lower real interest rates, which are already negative, are likely to result from today’s move which makes gold and other precious metals relatively more attractive. Despite this, gold fell initially following the decision, likely on the Fed’s negative comments about the economy.

See the full Federal Open Market Committee (FOMC) statement issued by the Federal Reserve:

(bold added)
For immediate release
Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.

The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time.

Comments

This entry was posted on Wednesday, September 21st, 2011 at 2:26 pm and is filed under Central Bank News, Economic News, Forex News, Political News, Precious Metals News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.