Come on let’s twist again, like we did last summer, Let’s Twist again, like we did last year…
Lyrics from this popular Chubby Checker song, was, essentially, a way to continue the popularity of his massive 1961 hit ‘The Twist’. Ironically, ‘The Twist’ became a national dance craze after the release of ‘Let’s Twist Again’. According to Billboards Book of Top 40 Hits, Chubby Checker hit with ‘The Twist’ in late 1960, ‘Lets Twist Again’ in the summer of 1961, with the nation beginning the dance craze, and the re-release of ‘The Twist’ in late 1961.
Sound a bit confusing? The Federal Reserve Bank’s version isn’t much different, and nowhere near as popular.
In an attempt to get the economy up and dancing, as it were, The Federal Reserve has purchased long term Treasury Bonds using the proceeds from the sale of maturing shorter term Treasury’s (those with maturity’s of 3 years or less).
The funds used to purchase the short term treasuries, came from the massive printing of money, known better as quantitative easing, and was packaged in the Troubled Asset Relief Program, or TARP. While this move move was successful in staving off a deep recession, and preventing the US economy from coming to a grinding halt, it failed to create the spending needed by Big Business to spur growth and job creation. This in turn, led to a second round of massive money printing, and was dubbed QE2.
But why is the Fed re-purchasing Treasuries at all? And why the shift to Long term bonds from shorter term bonds?
The idea is that lower interest rates encourage corporate businesses to borrow the capital needed to expand their operations, and in turn, create job growth. However, once the Federal Reserve announced it’s Zero Interest Rate Policy, they left themselves no room to lower rates further. Or did they?
Just like the original Operation Twist enacted by The Federal Reserve in the 1960’s, The purchase of long term maturity Treasury Bonds, is intended to flatten the yield curve, reduce the spread between long term and short term securities, strengthen the greenback, and promote spending. This manipulation, or ‘twisting’ of the yield curve, in theory, would have the same effect of lowering interest rates.
Having already acquired over 1.4 Trillion of new assets such as mortgage backed securities via monetary policy, and with the the populace ‘fed up’ with wasteful spending and failed attempts to create jobs, the Federal Reserve Board Members had another way to finance this operation. In a twist of their own, they simply rolled over money from maturing short term bonds to purchase these longer term securities, thus keeping and added debt burdens from the ledger.
Infusing mass amount of liquidity into the markets, weakens the local currency, and can have an inflationary impact. In 2011, ‘Helicopter Ben’, and the Open Market Committee announced Operation Twist, purchasing $400 billion dollars worth of bonds with maturities ranging from 6 to 30 years. The hope is to have results similar to that of Quantitative Easing, without the inflationary pressures of new liquidity in the system, or additional debt to the balance sheet.
The economy didn’t exactly get up and dance in response to the original Operation Twist, and many economists fear the same result with Operation Twist Again.