‘Operation Twist’ missing the mark on intended effect
Jeremy Hobson: The thing that is driving the market plummet
this morning may be the Fed. And its action yesterday to shift its investment portfolio toward long term-bonds in a move called “Operation Twist”.
Diane Swonk is chief economist with Mesirow Financial. She’s with us live from Chicago, as she is every Thursday. Good morning.
Diane Swonk: Good morning.
Hobson: So first of all, Diane, break through the jargon of the “twist” here. What is this action by the Fed really supposed to be doing?
Swonk: Well, it’s supposed to be discouraging investors from doing exactly what they’re doing, and getting money off the sidelines, making more risky bets in the equity market instead of the Treasury market.
Hobson: But we’d also heard that this was supposed to make mortgages easier to get for ordinary people?
Swonk: Well, it doesn’t exactly make mortgages easier to get, but it is expected to lower mortgage rates. What it is doing — of course, mortgage rates and low rates aren’t the only problem in the mortgage market these days.
Hobson: Well now why — going back to what you were saying at the beginning there — why are the markets doing exactly the opposite of what the Fed wanted them to do?
Swonk: In part because the Fed validated their worst fears that in fact the risks of a recession are quite substantial — stemming from the global financial market crisis going on in Europe. And in fact, overnight, the situation in Europe looks like it intensified in terms of being a crisis. We also got some bad news from China. So just that validation from the Fed — because they talk to central bankers around the world every day — that was a validation of a reality we already knew, but we didn’t really want to have it be credible.
Hobson: Diane Swonk, chief economist with Mesirow Financial, thanks as always.
Swonk: Thank you.
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