What is Operation Twist?
When you play the card game pontoon, you have the option to "stick" – keep the hand you are holding – or "twist" – draw another card. Until a few months ago, the Federal Reserve believed it had a strong hand in the battle to kickstart the US economy and was prepared to stick. But recent events have shown the economy struggling and unemployment staying high. Now it must twist.
What happens in practice?
Over the last two years of quantitative easing , the Fed has acquired a hand that includes $1.65 trillion of federal bonds – in other words, loans to the US government. Some of these bonds will mature in one or two years, some not for much longer – up to 30 years. If the Fed trades in some of its shorter-dated bonds for more of the longer-dated alternatives, demand for the longer-dated variety will exceed supply. This in turn will drive up the price of those bonds, which depresses the "yield" – the effective rate of return the holder of the bond gets on their investment. The yield determines the interest rate. Lower long-term interest rates will lead to lower 25-year mortgage rates, car loans and other bank lending rates.
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