Operation Twist, the Federal Reserve program intended to put push down longer-term interest rates, will continue past its original June 30 end date through the end of the year. The program aims to lower the cost of borrowing for businesses, auto purchases, consumer debt — and mortgages.
Formally known as the Maturity Extension Program, the program began last October. It shifts around Federal Reserve assets rather than pumping money into the economy, as did QEI and QEII — the earlier quantitative easing programs under which the Federal Reserve purchased $2 trillion in Treasury debt.
The central bank said in a statement on June 20 that it intends to swap approximately $267 billion in Treasury securities due to mature in less than three years with securities that have remaining maturities of six to 30 years. The original program was slated to swap about $400 billion in such securities. The Fed will maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities into new agency mortgage-backed securities, the financial instruments that most closely affect mortgage rates.
With rates already so low, what does this mean to homebuyers? Greg McBride, senior financial analyst at Bankrate.com, said, “The effect will be marginal at best. The record-low interest rates we are currently enjoying are the result of the current European debt crisis and concerns over the global economy, not the result of the original Operation Twist. The new one is symbolic at best.”
Rodney Carey, CEO of Woodward Asset Capital, agreed. “It will have a somewhat positive — and ‘somewhat’ is the operative word — impact on mortgage rates, but probably less than 10 basis points [one-tenth of 1 percent]. It is a low-impact initiative with the potential to drive up inflation, a greater risk.”
Carey said Operation Twist is “an arrow in a quiver full of other arrows it doesn’t match.” What is needed, he said, is one great initiative to get things back on track rather than all of the smaller ones that have been implemented.
Both Carey and McBride feel that another round of quantitative easing will be needed, but McBride said that, if the Fed decides to do a QEIII, “the size and timing will be critical to its success.”
