Homeowners cheer Fed's 'Operation Twist.' Wall Street, not so much.
The Federal Reserve announced Wednesday that it will drive down long-term interest rates through a strategy called 'Operation Twist.' The move has already pushed mortgage rates to historic lows, but Wall Street appears to have doubts about the plan's broader economic impact.
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On Wednesday, Ms. Gustlin was ecstatic – the Federal Reserve announced it would be selling $400 billion in short-term Treasury securities and reinvesting the money in long-term securities by next June in an effort to lower long-term rates, especially for mortgages. In the bond market, interest rates fell.
“My clients are now saving up to a half a point in cost for the exact same interest rate simply by waiting till the afternoon,” says Gustlin.
For potential homeowners, the Fed’s new monetary policy move – nicknamed "Operation Twist," since it involves the Fed selling short-term securities to buy long-term bonds – is a boon. Almost immediately after the Fed’s announcement, the interest rates on mortgages dropped to historic lows.
However, for the larger economy it’s less clear if the Fed’s actions will get business revving up or consumers pulling out their credit cards. That may be one of the reasons why the Dow Jones Industrial Average fell 283.82 points, most of it after the Fed’s afternoon announcement.
The Federal Reserve itself characterized the economy as slow.
“Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated,” stated the Federal Reserve, which also said it anticipates the pace of the recovery will improve in the future. But, in a more ominous note, the Federal Reserve also said it detected “significant downside risks to the economic outlook, including strains in global financial markets.”
That may be one of the reasons why some Fed commentators felt the Fed’s actions may not have much impact, especially for consumers.
“I don’t think too many consumers think interest rates are too high,” says Dean Croushore, chairman of the economics department at the University of Richmond and a former economist at the Philadelphia Federal Reserve. “People ... just don’t want any more debt.”