This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Fed Does the 'Twist' to Boost Economy

NEW YORK ( TheStreet) -- The Federal Reserve announced it will enact "Operation Twist," selling short-term securities to buy $400 billion in long-term Treasuries to support the economy.

The decision, which was delivered at the conclusion of the Federal Open Market Committee's September meeting, caused stocks to drop despite the fact that a maturity extension was overwhelmingly expected by the market. The strategy, otherwise known as "Operation Twist," involves selling some short-term securities to buy more long-term assets, thereby lowering long-term interest rates without further expanding the Fed's portfolio.

"This is Operation Twist with a twist," said Erik Davidson, deputy chief investment officer for Wells Fargo Private Bank. "It's probably more aggressive than what the market was expecting. The announcement came out late, but so far, stocks look spooked."

By the end of June 2012, the Committee will buy $400 billion of Treasury securities with remaining maturities of 6 to 30 years and sell an equal amount of Treasuries with remaining maturities of 3 years or less.

Federal Reserve Chairman Ben Bernanke

The market has been anticipating additional easing measures from the Fed since Chairman Ben Bernanke announced that the FOMC's September meeting would be extended by a day to allow for a "fuller discussion" of the range of tools it has as its disposal. Bernanke had also previously indicated that the central bank is prepared to use these tools in order to stabilize the recovery.

The Fed said it would extend the maturity of its holdings in order to "support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate."

The FOMC also said it will reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities into agency mortgage-backed securities to help boost mortgage markets. The Committee will also continue to roll over maturing Treasury securities at auction.

"The Fed is really doing everything that they can do, but at some point they're just going to run out of tools," Davidson said. "With Operation Twist they're providing both the carrot and the stick by making it so miserable to not borrow that they're forcing investors our there. Investors should get out of bonds and pick up all the attractively-priced assets such as stocks ... There's so much uncertainty and investors crave certainty. When they don't have it, they price it in, and that's what brings down valuations."

Committee members Richard Fisher, Narayana Kocherlakota and Charles Plosser voted against the additional easing measures.

As expected, Committee members voted to keep key interest rates unchanged at zero to 0.25% and repeated their intention to keep rates exceptionally low at least through mid-2013.

Minutes from the FOMC's September meeting will be released on Oct. 12. The Committee's next meeting will be held Nov. 1-2.

-- Written by Melinda Peer in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,416.85 +225.48 1.31%
S&P 500 2,021.25 +19.09 0.95%
NASDAQ 4,683.4070 +45.4130 0.98%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs