Thursday, September 22, 2011

Ben Bernanke 跳 twist dance

Operation Twist

The Federal Open Market Committee action known as Operation Twist (named for the Twist dance craze of the time) began in 1961. The intent was to flatten the yield curve in order to promote capital inflows and strengthen the dollar. The Fed utilized open market operations to shorten the maturity of public debt in the open market. It performs the 'twist' by selling some of the short term debt (with three years or less to maturity) it purchased as part of the quantitative easing policy back into the market and using the money received from this to buy longer term government debt. Although this action was marginally successful in reducing the spread between long-term maturities and short-term maturities, some economists have suggested it did not continue for a sufficient period of time to be effective. Despite being considered a failure in near-term analyses, the action has subsequently been reexamined in isolation and certain economists have suggested it was more effective than originally thought. As a result of this reappraisal, similar action has been suggested as an alternative to quantitative easing by central banks.

The Federal Open Market Committee concluded its September 21, 2011 Meeting at about 2:15PM EDT by announcing the implementation of Operation Twist. This is a plan to purchase $400 billion of bonds with maturities of 6 to 30 years and selling bonds with maturities less than 3 years, thereby extending the average maturity. . This is an attempt to do what Quantitative Easing (QE) tries to do, without printing more money and expanding the Fed's balance sheet and therefore avoid the inflationary pressure that QE brings.  This announcement brought a bout of risk aversion seen in the equity markets, and strengthened the US Dollar, whereas QE II had weakened the USD and supported the equity markets.

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