Federal Reserve Begins Operation Twist

Measures Meant to Keep Interest Rates Low and Encourage Consumer Lending

by Curtis White on September 22, 2011

On September 21^st, the Federal Reserve launched Operation Twist. More or less the same as policies enacted in the 1960s, Operation Twist is designed to keep interest rates low in order to help consumers take out mortgages and other types of loans. The new economic stimulus by the Fed has created dissent even amongst American banks.

Rather than putting money directly in the economy, Operation Twist will merely involve selling $400 million worth of short-term Treasuries for an equal amount in bonds with longer terms. The sale runs from October to June of 2012.

Selling these short-term bonds will lower interest rates on business loans, mortgages and will hopefully encourage consumers and businesses to take out new loans.

The plan is not without its share of detractors. The GOP, including House Speaker John Boehner, sent the Fed a letter this week asking that the Federal Reserve cease its stimulus efforts.

“To date, we have seen no evidence that further monetary stimulus will create jobs or provide a sustainable path towards economic recovery,” said the letter, which was addressed to Fed Chairman Ben Bernanke. GOP presidential hopeful and current Texas governor Rick Perry even went so far as to call this type of plan “treasonous” in remarks made earlier in the year.

Some bank presidents have also expressed their disagreement. In the words of Frank Sorrentino, CEO of North Jersey Community Bank, “This is not a situation where people are saying, ‘gee, I really want to buy that house but interest rates are too high.’ Rates are already at historic lows and over the last six to nine months, we have not seen loan demand go up.”

Despite the criticism the Federal Reserve decided to take this course of action. Democrats in Washington have generally supported the measure. Some, like New York Senator Charles Schumer, have asked the Fed to “ignore” the letter, claiming that Republicans should not try to influence the independent body. Of course, telling the Fed to ignore something is itself an attempt to influence its decision.

That may not be such a bad thing, though, according to House Democratic Whip Steny Hoyer, “The Republicans and Democrats and others have the right to make suggestions to the Fed or to the president or to the Congress. And very frankly, that’s one of the glories of our country. So they have a right to do it. And of course, the Fed as an independent body has the right to say, ‘Well thank you very much, but we don’t agree.’”

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