The Federal Reserve’s main mission is to drive the economy and restore employment rates back to normalcy. With unemployment at almost 10 percent in the nation, the Federal Reserve has the authority to lower interest rates to stimulate the economic standing of the country. With interest rates for 10-year Treasuries is currently 1.69%, but the rates can always go lower. To promote spending and borrowing, the Fed has created a plan you may be familiar with, known as “Operation Twist”.
The Federal Reserve has prepared for the aftermath of the recession by purchasing more than $1 trillion in bonds to reduce the interest rates for medium to long-term bonds. The major benefit from medium-term bonds is that they are due within less than 10 years. This means that the interest rates will be due sooner than later which means that the economy will be re-established quicker. Since interest rates on medium-term bonds are low already, payments will be quicker since it is already at a lower rate.
So what does that mean for the government? The Fed is entitled to sell the medium-term bonds for longer-term bonds to drive the interest rates of the Treasuries. Operation Twist was created to drive the demand for bonds, like mortgages, and have interest rates lower in result. A study found that the interest rate on Treasury bonds had lowered by approximately 0.15 percentage points.
Senior Financial Analyst for Bankrate, Greg McBride, stated:
“The extension of Operation Twist is largely a symbolic move, as the main drivers of long-term interest rates currently are the European debt crisis and concerns about the global economy,” “That being said, the Fed did not have the luxury of letting Operation Twist sunset at the end of the month.”
Although the interest rates are already at major lows, the economy cannot just prosper due to solely interest rates. The Federal Reserve’s major responsibility is to push the economy and with Operation Twist, there is a major focus for homeowners to purchase more long-term investments like mortgages to head towards full recovery.