Effects of Operation Twist

by Guest Author: James D. Hamilton
The Federal Reserve announced on Wednesday ([1], [2]) that it will sell some of its shorter-term assets in order to buy more longer-term assets. Here I assess some of the possible consequences of this move.

The modest effects that one could reasonably anticipate for a measure like operation twist are easily swamped by other developments, and even a sizable effect on 30-year Treasury yields would not in my mind provide a major stimulus. I think the correct interpretation is that the Fed would like to bring some more stimulus, this was something they could do in that direction, so they did it.

But if you were about to drown, I wouldn’t want to count on operation twist as your lifeline to safety.