The Fed Does a TWIST

The Federal Reserve took another step today as part of their increasingly activist role in the capital markets in trying to provide further stimulus to a U.S. economy that is struggling to stand on its own legs.  In a move that was not surprising in terms of strategy, but perhaps surprising in terms of size (many economists were hoping for a larger program while many politicians were hoping for a smaller program), the Fed announced, through a program being referred to as “Operation Twist”, that it would be buying more longer-term U.S. Treasuries (i.e. more than 6 years), representing an increase of approximately $400 billion by June 2012, while selling a comparable amount of short-term U.S. Treasuries (i.e. less than 3 years) in an effort to flatten the yield curve and presumably make credit even cheaper.

In addition to this planned activity in U.S. Treasuries, the Fed also said it would reinvest the proceeds from maturing government agency debt holdings and mortgage-backed securities holdings into mortgage-related debt.

These actions come on the heels of one of the recent FOMC meetings where the Fed essentially showed us their playbook by stating their intentions to keep interest rates “exceptionally low” until at least mid-2013.

Clearly, the Fed remains concerned, as do we at Hennion & Walsh, with the pace and sustainability of the current, anemic U.S. economic recovery.