Bernanke Throws $400 Billion at ‘The Twist’

Ben Bernanke and friends at the FOMC gave their decision on interest rates today.  As you would expect, there was little that could be formally done with Fed Funds at the near-0%, but the catch came by “The Twist” where the investment community was expecting the Fed to move its shorter-dated Treasury portfolio further out the yield curve by moving to invest in longer-dated maturities to hold down longer-term interest rates.

The FOMC voted 7-3 for Fed Funds rate action.  It said that conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”  The Fed also said that it will use its maturing securities and short-term maturities to purchase up to $400 billion in longer-dated 6 to 30 year maturities.

Basics… economic growth remains slow; point to continuing weakness in overall labor market; Household spending has been increasing at only a modest pace; Investment in non-residential structures is still weak, and the housing sector remains depressed.

The positive was that business investment in equipment and software continues to expand.  Inflation appears to have moderated since earlier in the year and longer-term inflation expectations have remained stable.  It anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate.

Here is “THE TWIST”: the Fed will extend the average maturity of its holdings of securities by purchasing by the end of June 2012 some $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and it will sell an equal amount of Treasury securities with remaining maturities of 3 years or less.  The aim is to put downward pressure on longer-term interest rates and to help make broader financial conditions more accommodative. The Fed will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities AND will maintain its existing policy of rolling over maturing Treasury securities at auction.

Voting against the action were Fisher, Kocherlakota, and Plosser, who did not support additional policy accommodation at this time.

FULL STATEMENT HERE

JON C. OGG