The encyclopedia · Finance & Accounting · Financial decision · 1961–1966
In 1961 the Fed and Treasury twisted the yield curve to cut long rates without losing gold
The Kennedy administration and the Fed sold short bills and bought long bonds, lowering long-term yields without touching short rates.
Federal Reserve System · US Department of the Treasury
the move
When John F. Kennedy took office in January 1961, the US was in recession but could not simply cut short-term rates: under the Bretton Woods fixed exchange rate system, low US short rates pushed dollars into gold and higher-yielding European assets, draining several billion dollars in gold per year.
The Kennedy administration and the Federal Reserve responded with Operation Twist. On February 20, 1961, the Fed publicly committed to buying Treasuries with maturities of five years or longer, financing those purchases by selling short-term bills, while the Treasury shifted new issuance toward shorter maturities.
High-frequency event studies show the announcements worked: long-term Treasury yields fell, short yields rose, and the cumulative effect was a statistically significant reduction of about 15 basis points in long-term yields — a clear yield-curve twist produced without expanding the money supply or worsening the gold outflow.
why it works
- Separating long from short rates let policy stimulate investment without touching the rate that drove cross-border arbitrage.
- Financing long purchases with short sales kept total reserves and the money supply roughly unchanged.
- Coordinated Treasury issuance and Fed purchases sent one consistent signal to markets.
- The same maturity-swap logic was revived in 2011 when short rates were already at zero.
what transfers
When one part of your market is constrained, separate it from the rest: a maturity swap can move the rate you care about while leaving the constrained rate alone.
what came after
Operation Twist's long-term effects were real but moderate, and the concept became a template: the 2011 Federal Reserve twist repeated the playbook at the zero lower bound, and the mechanism is now a standard part of the debate over balance-sheet policy.
references
- Operation Twist and the Effect of Large-Scale Asset Purchases (Economic Letter 2011-13)
- Operation Twist and the Effect of Large-Scale Asset Purchases (full text)
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