Operation Twist Is ‘Working’

What makes “Operation Twist” different from old-fashioned quantitative easing is that in QE2, they tried to push all bond yields down, whereas in a twist move, you try to alter the shape of the yield curve. What does that mean? It’s perhaps easiest just to illustrate what changed between the 20th and the 21st:

The short-term rates, you see, went up slightly even as long-term rates fell. That’s the twist. It also shows, incidentally, that contrary to some press reports the financial markets weren’t fully expecting action of this scale in advance of the announcement. The whole pre-announcement week saw minor changes in rates going in the other direction. At any rate, as you can see the Fed’s strategy worked and the yield curve is now flatter.


Given that this “worked,” the question is why Ben Bernanke thinks it’ll work. What’s really supposed to happen as a result of this? Non-underwater households will presumably refinance their mortgages at a somewhat greater clip and that’ll put some cash in their pockets. But nothing’s been done here to alter expectations. And why do this rather than QE3? My understanding of the original 1961 Operation Twist is that the idea was to promote capital inflows in order to maintain US gold reserves. The contemporary parallel would involve raising the price of the dollar, which given the size of the trade deficit is totally counterproductive.