Tags: fed | Treasury | Operation | Twist

Treasury Seen Supporting Fed in 'Operation Twist'

Wednesday, 14 Sep 2011 01:23 PM

The U.S. Treasury Department will likely work with the Federal Reserve should the latter roll out a special stimulus program dubbed by the markets as "Operation Twist."

The economy remains weak and interest-rate cuts aren't spurring growth, so the Fed may resort to measures like Operation Twist, where the monetary authority buys up longer-term Treasury securities to drive down long-term interest rates by reducing the amount of such debt available to other investors.

The Treasury Department, however, could step in and sell even more long-term bonds to take advantage of the demand coming in from the Fed, which would negate the effects Operation Twist would have.

That's not likely going to happen, the Financial Times reports, even though Federal Reserve officials recognize the fact that the Treasury could offset the effects of Federal Reserve bond purchases.

"Indeed, in an ‘Operation Twist’-type activity, the Treasury could actually undo it by taking advantage and offering a lot more long-term debt," says Charles Plosser, president of the Philadelphia Fed, tells the paper.

Operation Twist, which got its name when first rolled out in 1961 around the same time of Chubby Checker's song because it twists interest-rate behavior, would be the latest in a series of measures to spur more robust economic growth.

Some Federal Reserve officials, including Chicago Fed President Charles Evans, have said stimulus measures are needed to prioritize creating jobs over controlling inflation.

"We again find ourselves with a weakened economic outlook and again trying to decide what further accommodation to provide," Evans says, according to CNN Money.

"I'm sure everyone will agree that we seriously don't want to be in this position again at this time next year. I believe that means we need to take strong action now."

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