Wednesday, September 21, 2011

'Twist' Tops the Ops at the FOMC

In a well-choreographed move, the Federal Open Market Committee (FOMC) OK'd today by a 7-3 vote a new cover of "Operation Twist." The original version was discussed in "Go, Chubby, Go: Let's Twist Again!" on Monday.

According to the FOMC statement belatedly released at the conclusion of its two-day meeting: "[T]he committee decided today to extend the average maturity of its holdings of securities. The committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of [six] years to 30 years and to 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 committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate."

The FOMC also noted: "To help support conditions in mortgage markets, the committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the committee will maintain its existing policy of rolling over maturing Treasury securities at auction."

All things considered, I believe this plan may have a limited effect on the U.S. economy, but I think its potential impact on the yield curve may constitute a headwind in terms of the profitability of certain financial institutions (e.g., banks).