WASHINGTON — Digging deep into its bag of leftover economic spark plugs, the Federal Reserve launched an unorthodox operation Wednesday aimed at lowering long-term lending rates and thus spurring more spending and investment in an economy flirting with recession.
The Fed said it would sell $400 billion in short-term government bonds and replace them with longer-term government bonds of equal value.
The controversial action is dubbed Operation Twist because it’s patterned after a similar move in the 1960s.
By the end of next June, the Fed intends to purchase $400 billion worth of Treasury securities with remaining maturities of six years to 30 years. In tandem, it will sell an equal amount of Treasury securities with remaining maturities of three years or less.
“This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the Fed said in a statement at the conclusion of a two-day meeting. Three voting members dissented, arguing that the action wasn’t necessary.
While financial markets had expected the move, it was accompanied by a Fed statement that noted “significant” risks of further economic downturn. That spooked investors, and stocks plunged. The Dow Jones industrial average shed 283.82 points to finish at 11,124.84.
“Operation Twist is the right thing to do, but it won’t help the economy much,” said Mark Zandi, chief economist for forecaster Moody’s Analytics.
Although the yield on 10-year Treasurys had fallen below 2 percent, rates on the lowest-cost 30-year mortgages have remained stuck at around 4.25 percent, an unusually large gap, said Boulder mortgage banker Lou Barnes.
That spread of 2.25 percentage points is much larger than the average spread of 1.75 percentage points, he said, and the Fed “twist” should start to slowly push mortgage rates lower.
Lower lending rates might spark greater mortgage refinancing, as well as home and car sales and perhaps business investment. But, said Zandi, “since rates are already so low, the boost to growth from the Fed’s actions will be on the margin.”
Experts warned that the realities of a weakening economy, reflected in the Fed statement, might outweigh the benefits from the new action.
Denver Post staff writer Aldo Svaldi contributed to this report.
