The Federal Reserve’s FOMC meeting results will be announced today. Ben Bernanke’s arsenal is running low to revive the world’s economy. The rumors before the announcement are that he will institute “Operation Twist” which was last used in the 1960s.
As French banks are borrowing money to survive (from the Fed), will France will thrown into the PIIGS’ sty next? The Federal Reserve is now trying to implement policies to save both the United States and Europe. Operation twist may well be the final tool left to accomplish this but no one believes it will be effective.
The interest rate on 10-year Treasury bonds is 1.95 percent. This is crazy low. It’s lower than inflation. But the Federal Reserve may be about to push the rate even lower.
The Fed has at its disposal one key tool: interest rates. So when Fed officials are worried about unemployment, they try to drive down interest rates, in an effort to encourage people and businesses to borrow and spend.
And with unemployment over 9 percent (and core inflation at 2 percent), the Fed is likely to keep hammering away, trying to push down interest rates.
The Fed will announce its next move on Wednesday afternoon, at the close of a big, two-day meeting. That move is expected to be something known as “Operation Twist.”
Here’s what it means.
1. The Fed already owns more than $1 trillion in bonds, purchased over the past few years in an effort to bring down medium- and long-term interest rates.
2. A lot of those bonds — hundreds of billions of dollars worth — are medium-term bonds, which come due in the next few years.
3. Interest rates on medium-term government bonds are already near zero.
4. The Fed may sell some of those medium-term bonds, and use the proceeds to buy 10-year Treasuries.