The Federal Reserve has announced the end of QE2, but the rumor mill is alive with talks of QE3. What exactly is QE? Essentially its an operation by the Federal Reserve to change the duration of U.S. Dollar liabilities. I’ve posted several times on the topic over the past few years, not a few times have I misunderstood QE – but I finally got it right (I keep all my posts online, even those that turn out to be incorrect). I think the best place to read about QE is at The Pragmatic Capitalist Blog.
So what is Operation Twist? Its essentially a form of QE and QE is essentially a form of Operation Twist. The Prag Cap blog does a great job of explaining it here. The real difference is that instead of announcing how much (quantity) in Treasury bills, bonds and notes the Federal Reserve will buy (and over what time frame) the Fed announces a target interest rate and stands ready to BUY as much as necessary to maintain that target rate. By doing this the Federal Reserve essentially is telling the world what rates will be.
There is no real indication that this is what the Federal Reserve will do, but the rumors are flying and I thought you should have some background. Will this strategy work? The real question is what is the aim of this strategy? There could be several aims, but one is to keep interest rates low on our national debt and another is to spur lending. I’m not of the belief that monetary operations at this point will have much affect on the economy.
Stay Tuned, more to come.
Scott Dauenhauer, CFP, MSFP, AIF