Fed Announces Operation Twist

New plan focuses on mortgage rates; experts’ response is mixed

After a two-day closed door policy meeting last week, the Federal Reserve announced its latest effort to stimulate the economy: “Operation Twist.”

The crux of the plan is to put downward pressure on long-term interest rates by shifting $400 billion from short term Treasury holdings to longer term Treasuries.

Writing for MarketWatch, David Weidner explains that driving long-term interest rates even lower than they have been could help banks by increasing financing activity and generating more fees and transactions. Moreover, he adds, “many homeowners on the edge of being underwater on their home loans would have an opportunity to cut their housing costs. What the banks lose in profit margins — they are currently borrowing for nearly nothing and lending for 4% or more — would potentially be offset by fewer bad loans.”

Economic and housing industry experts are not convinced the outcome is going to turn out to be what the Fed expects and wants it to be. Interviewed for an article in Forbes Magazine, Steve Blitz, senior economist at ITG Investment Research, said that “borrowing is about confidence. If I’m uncertain about growth in my income, I’m not going to go get a mortgage.”

At the same time, as noted in an article on Zacks,

“While all eyes remained fixed on the Federal Reserve’s announcement, data about a surge in the existing-home sales in August was hardly factored in. According to the National Association of Realtors: “Total existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, rose 7.7 percent to a seasonally adjusted annual rate of 5.03 million in August from an upwardly revised 4.67 million in July, and are 18.6 percent higher than the 4.24 million unit level in August 2010.”

Zacks’ article concludes with Lawrence Yun, NAR chief economist, observing that although some of the upswing in existing-home sales in August could be attributed to delayed sales from earlier in the year, “favorable affordability conditions and rising rents are underlying motivations.”