Fed's 'Operation Twist,' Explained In 4 Easy Steps : Planet Money Here's the Fed's likely next move in its effort to push down interest rates even further.
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Fed's 'Operation Twist,' Explained In 4 Easy Steps

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Fed's 'Operation Twist,' Explained In 4 Easy Steps

Fed's 'Operation Twist,' Explained In 4 Easy Steps

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OK. While electric vehicle fans gather in Missouri, Federal Reserve policymakers are meeting today here in Washington, D.C. Interest rates in the United States are incredibly low right now. And it looks like the fed wants them even lower. One widely talked about move officials are considering has an unusual name. It's called Operation Twist. Robert Smith from NPR's Planet Money team put on his dancing shoes to explain how it could make borrowing even cheaper.

ROBERT SMITH: It is not a coincidence that Operation Twist sounds a lot like the dance craze from the '60s, because they share a common inspiration - Chubby Checker.


CHUBBY CHECKER: (Singing) Come on, baby. Let's do the twist.

SMITH: In the early '60's, there was a transformation on the dance floor. Up until then, boys danced with girls by actually holding each other. But after seeing Chubby Checker do the Twist, those kids dropped their hands, moved apart...


CHECKER: (Singing) And go like this...

SMITH: Meanwhile, at the Federal Reserve, the nation's economic leaders were coming up with a different crazy move.

RANDY KROZNER: Economists know about this. This is sort of a famous episode from the 1960s.

SMITH: Randy Krozner was once a governor of the Federal Reserve. Now he's a professor at the University of Chicago. And Krozner says that back in the early '60s, the country had some of the same problems we face today -a weak economy and a growing debt. And the Fed thought...

KROZNER: Well, maybe there's a way to bring down the financing costs for the government.

SMITH: The Fed came up with a plan to nudge down long term interest rates. In fact, they wanted it to be known as The Nudge. But come on, nobody wants to dance the Nudge. It became known as Operation Twist after the dance craze.


CHECKER: Hey everybody, get in line we're going to make a twist train...


SMITH: But the Federal Reserve has already driven these short term rates down to almost zero.

KROZNER: They've been hammering at that pretty hard, so they're looking for an additional hammer.

SMITH: The Fed needs another trick to perk up the economy. And all of a sudden that old dance was back in fashion.


CHECKER: (Singing) We're going to the twist and it goes like this. Come on, let's twist again like we did last summer. Yeah, let's twist again, like we did last summer. Yeah, let's twist again...

SMITH: So The Twist tries to twist down the interest rates on longer term loans. And the Fed does this buy buying and selling Treasury bonds out in the marketplace. They basically sell a bunch of short-term bonds that they have lying around. And the Fed will use that money buy up a bunch of longer bonds, say 10-year Treasury bonds. And that demand helps push the interest rates down.

KROZNER: Ten years because a lot of home mortgages are closely associated with the 10-year rate.

SMITH: I mean just think about houses. There are a lot of reasons why people don't buy homes. Maybe they fear losing their job or they think that prices are still heading down.

KROZNER: The interest rate is one very important price but it's not the only one.

SMITH: Antulio Bomfim is one of the economists who did the study. And he says there is only so much the Federal Reserve can do by just manipulating the interest rates. He says the Fed is like Chubby Checker dancing by himself without any help from the Congress or the president,

ANTULIO BOMFIM: Monetary policy cannot do this alone, in terms of helping bring the economy back to a better footing at a faster pace.

SMITH: Yes, so perhaps The Twist is the wrong metaphor here because the Federal Reserve needs a partner.

BOMFIM: Needs a partner.

SMITH: They need to waltz or something.

BOMFIM: Yes. Yes. Yeah, that's a good one.


SMITH: Robert Smith NPR News, New York.


THE BEATLES: (Singing) Ahh, ahh, ahh, ahh, ahh. Well, shake it up, baby now. Shake it up, baby. Twist and shout. Twist and shout. Come on. Come on. Come on. Come on, baby now. Come on, baby. Come on and work it on out?

GREENE: And you're listening to MORNING EDITION from NPR News.

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