The dismal August jobs report has markets bracing for a monetary policy tool designed to spur more robust economic growth and ultimately, more hiring.
Get ready for Operation Twist.
To speed up a sluggish or even contracting economy, the Federal Reserve lowers the fed-funds rate to encourage banks to lend.
It's already done that — rates are close to zero.
|Fed Chairman Ben Bernanke
(Getty Images photo)
If that doesn't work, the Fed and chairman Ben Bernanke can print money and buy assets from banks in order to increase the amount of money in circulation with the aim of fueling investment and ultimately, economic growth.
That tool is called quantitative easing, and the Fed has tried it twice, with the first round, known as QE1, involving the purchase of $1.7 trillion in assets from banks, namely mortgage-backed securities.
A second round of quantitative easing, known as QE2, wrapped up in June and involved a $600 billion purchase of government bonds from banks.
Today, the economy still remains weak and unemployment rates dismal: job creation was flat in August and the rate held at 9.1 percent.
Plus the side effects of QE1 and QE2, namely a weaker dollar and rising inflationary pressures, have arguably threatened the pace of what little recovery the economy has seen so far.
So what now?
Meet Operation Twist, where the Fed sells short-term bonds and buys up longer-term securities on the same day in such a fashion that the Fed works to ensure long-term interest rates remain low and not swell its balance sheet larger than it already has.
When the Federal Reserve buys Treasurys with maturities of 10 years or greater in an attempt to keep longer-term rates lower, investors will hopefully go out and take out longer-term debts like mortgages.
"Following today’s worse-than-expected jobs report, we now look for the FOMC to announce a lengthening of the average maturity of the Fed’s balance sheet at the September 20-21 meeting," Goldman Sachs chief U.S. economist Jan Hatzius writes in a note to clients, CNBC reports.
Markets are calling such a policy Operation Twist in that it twists the yield curve to ensure longer-term rates stay low even if short-term rates go up.
Some say the plan, if it ever comes to pass, won't do much in that rates are already low as it is, banks don't want to lend and people don't want to borrow to buy houses, especially if prices keep falling.
"The fact that the 30-year is where it is now has nothing to do with the Fed. It's the economy," says John Lekas, CEO of Leader Capital in Portland, Oregon, according to CNNMoney.
"Housing prices have gotten lower. Banks won't lend money until prices start going up."
Some analysts say even without the dismal jobs data Operation Twist is in the works anyway.
"We thought they were going to do it in August," says Ira Jersey, interest-rate strategist at Credit Suisse in New York, according to Reuters.
"But I guess with some of the operational issues it raises they wanted to wait."
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