Fed Annouces Operation Twist

Fed Annouces Operation Twist

I’ve been meaning to blog about this for about a week and I figured better late than never.  Article compliments of Jason Griesser of Trident Mortgage.

Federal Reserve Chairman Ben Bernanke, acting more aggressively than expected, launched a new package of measures to support a limping economy and once again took the kind of unconventional approach that has become a trademark of his tumultuous five-year tenure running the central bank.  The latest move by the chairman was a decision to dramatically recast the Fed’s $2.65 trillion securities portfolio in an effort to reduce long-term interest rates. The Fed plans to shift its holdings so it will have more long-term U.S. Treasury bonds and more mortgage debt than previously planned. It hopes the lower rates will boost investment and spending and provide a shot of adrenaline to the beleaguered housing sector.  The shift toward longer-term Treasury securities was largely expected but slightly bigger than many in the markets had anticipated, and the action on mortgage bonds was a surprise.  The decision didn’t come without the kind of controversy that also has defined Mr. Bernanke’s tenure at the Fed. Three of 10 voting Fed officials opposed the action at the conclusion of a two-day meeting, saying they didn’t want new measures now. The moves came just days after Republican congressional leaders took the unusual step of sending Mr. Bernanke a letter urging the Fed to do nothing, fearing any action could do more harm than good. He effectively ignored them.

Under the new program, which resembles a 1961 Fed-Treasury program called “Operation Twist,” the Fed will sell $400 billion in Treasury securities that mature within three years and reinvest the proceeds into securities that mature in six to 30 years, significantly tilting the balance of its holdings toward long-term securities. In addition, it will take the proceeds from its maturing mortgage-backed securities and reinvest them in other mortgage-backed securities. For the past year, it has been reinvesting that money into Treasury bonds, shrinking its mortgage portfolio.

Fed officials have become more concerned about the health of the mortgage market in recent months, with senior officials, including Mr. Bernanke, urging the rest of the government to find ways to support the sector. There has been growing concern in the mortgage industry in recent weeks that even as U.S. Treasury yields have been declining, mortgage rates haven’t fallen as much, preventing many homeowners from refinancing their home loans. The difference in yield between a 10-year Treasury note and a conventional 30-year mortgage has widened by almost half a percentage point. The Fed’s decision to start buying mortgage debt again with the proceeds of maturing mortgage bonds is an attempt to alleviate that pressure. It also marks a reversal by the central bank and a meaningful signal about its concern about the economy. Officials had decided last year that they wanted to shift their portfolio away from mortgage bonds as the economy improved and had allowed roughly $250 billion of mortgage debt to retire. Their decision to stop that process shows they don’t see the economy improving anywhere near as fast as they had hoped.

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Blog post compliments of CenterCityTeam’s Philadelphia Real Estate Blog

Frank L. DeFazio, Esquire
Prudential Fox & Roach Realtors – Society Hill
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