The encyclopedia · Finance & Accounting · Financial decision · 2011-2012
The Fed flattened the yield curve by selling short Treasuries to buy long ones.
In 2011 the Fed bought $400bn of long bonds and sold an equal pile of short ones, easing long rates without printing more money.
Federal Reserve Board
the move
By September 2011 the Fed's policy rate had been near zero for three years and the recovery was stalling. Its balance sheet was already large, and expanding it again risked inflation expectations and political backlash.
So the committee chose a different lever. On 21 September 2011 it announced it would buy $400 billion of Treasury securities with remaining maturities of 6 to 30 years and sell an equal amount of those maturing in 3 years or less, leaving the balance sheet's size unchanged while stretching the average maturity from about six years to roughly eight. It also kept reinvesting maturing agency debt and mortgage-backed principal.
The aim was to put downward pressure on long-term interest rates and make financial conditions more accommodative without the money-supply optics of a fourth purchase round. Journalists called it Operation Twist after the Fed's 1961 program, and markets judged the move modest at best.
why it works
- The policy rate was pinned at zero, so conventional easing was exhausted
- A twist holds the balance sheet flat, avoiding the inflation optics of more purchases
- Long-term yields drive mortgages and corporate credit, so targeting them mattered most
- Reinvesting maturing principal kept the short end from tightening
what transfers
When the short rate is pinned at zero, a central bank can still ease by changing the average duration of its bond portfolio rather than its size.
what came after
The program ran to June 2012. Long yields did fall, but equities initially sold off after the announcement, and many analysts read the move as timid. The Fed later folded the same logic into large-scale asset purchases and explicit forward guidance.
references
- Federal Reserve issues FOMC statement
- Operation Twist marks a turn for the worse as the market mayhem continues
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