July 20, 2012

The Federal Reserve’s $267 billion expansion of Operation Twist, an effort to boost economic growth, is unlikely to be effective and should be suspended, Heritage Foundation economist J.D. Foster explains.

Operation Twist, he explains, is “the Federal Reserve’s latest effort to compensate, through monetary policy, for the failure of the Obama Administration’s fiscal and regulatory policies to stimulate the economy.”

With the U.S. economy languishing, the global economy struggling, and no help on the horizon from the President or Congress, Chairman Ben Bernanke understandably seeks to do something, indeed anything, to help. If nothing else, the Fed’s actions should put to rest any doubt President Barack Obama’s economic policies have failed. The Fed would not be driven to desperate measures if the President had pursued effective measures instead of a political agenda to grow the federal government and federal debt to European proportions.

But however well intentioned, the plan will likely be ineffective because it will add even more confusion and uncertainty to markets, Foster writes. Current long-term interest rates are already at or near record lows, and if these low rates cannot boost the economy, Operation Twist will not have a significant economic effect.

Furthermore, if the economy does recover, the Fed will likely find it difficult to sell its large supply of long-term securities without increasing long-term rates, which will weaken the impact of recovery. What’s more, the Fed plans to sell certain securities, which could actually boost short-term interest rates, complicating recovery.

Foster urges the Fed to abandon Operation Twist and recognize that monetary policy cannot solve today’s economic problems. The Fed, he says, should remind markets that “in the event of another financial crisis, the Fed is ready, willing, and able to respond in its role as lender of last resort to provide liquidity where and when it is needed.”

But for now, it’s up to the President and Congress to formulate a successful economic recovery plan.

Click here to read more about Operation Twist

Do you think Operation Twist is going to help the economy?