The Federal Reserve decided to continue their “Operation Twist” program until the end of the year. It was scheduled to expire this month. The vote of the Federal Open Market Committee was nearly unanimous, with only Jeffrey Lacker of the Federal Reserve Bank of Richmond opposing the move.
Here’s the full policy statement by the FOMC. The only policy change announced, the extension of Operation Twist, is described here:
The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative.
Nobody has really judged Operation Twist as successful. It is helping to keep interest rates low, and I suppose you can say that this is partially responsible for an increase in mortgage refinancing. Mortgage purchases remain low, however, and substantial numbers of people are locked out of the lowest rates on refis because of their underwater status. Moreover, interest rates are low mostly because of the depressed economy, not Operation Twist.
The statement concludes that the FOMC “is prepared to take further action as appropriate to promote a stronger economic recovery” as warranted. Yet everything in their policy statement suggests that such action would be warranted right now. The report states that job growth “has slowed in recent months,” that consumer spending is rising “at a somewhat slower pace than earlier in the year,” that the housing sector “remains depressed,” that inflation “has declined,” that the unemployment rate “will decline only slowly” in the coming months, that there is “significant downside risks to the economic outlook” on the horizon, and that inflation will run “at or below the rate” consistent with the Fed’s mandate. In other words, the Fed is whiffing on everything. They are failing in their task to maximize employment, and failing in their task to generate price stability at the target rate. The economy is stunted, and the Fed knows it. They’re just choosing to do next to nothing about it.
I have sympathy for the critique that the Fed cannot really get the benefits of low credit where they need to go, and that only fiscal policy will solve the crisis. But clearly Congress has finished legislating for the year. The Fed is the only game in town. They have options, whether it’s buying municipal debt or announcing a higher inflation target. And they’ve left the playing field as well.
UPDATE: Economist Justin Wolfers seems to think that this sets the stage for a bigger monetary move at the next meeting, if the economy still shows slack.