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Why The Fed’s Latest Move Isn’t Likely To Do Much

Filed by KOSU News in Business.
June 20, 2012

The Federal Reserve just said it would extend “Operation Twist.”

We talked about Operation Twist earlier this month, when we spoke with Joseph Gagnon, a former Fed economist now at the Peterson institute. We wrote:

The Fed has been selling short-term government bonds and buying long-term government bonds. People call this “Operation Twist,” and the the main effect is to push long-term interest rates down. (Short-term interest rates have remained super low, largely due to other Fed policies.) The Fed may announce that it’s extending this program by a few months.

Gagnon says it’s pretty likely that the Fed will do this. In fact, it’s so likely that it’s already priced into government bonds.

The basic idea of pushing down long-term interest rates is to encourage people to borrow and spend money, and to encourage businesses to borrow and hire.

But long-term interest rates are already near record lows. The bigger problem is that lots of people still can’t get loans at all.

“If you don’t need the money, you can get it all day long,” a business owner recently told the WSJ. “Thank you, Ben Bernanke.”

Gagnon told us earlier this month that the impact of extending operation twist would be relatively small.

For more, see The Fed In 3 Phrases. [Copyright 2012 National Public Radio]

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