Operation Twist was one of Federal Reserve Chairman Ben Bernanke’s defining strikes against the struggling United States economy. Through the operation, the Fed sold short-term bonds and used the proceeds to buy back $45 billion in long-term bonds each month.
The idea was to bring down longer-term yields in order to make loans for homes, cars, or large projects less expensive. At the same time, short-term yields were pushed up as bond prices fell. The result, theoretically, was a stimulating effect on the economy.
However, with the war on the economy still going poorly in September, the Fed initiated what amounted to a troop surge called quantitative easing round 3, or QE3. The new plan was to buy $40 billion in mortgage-backed securities per month until economic conditions improved — or, to just keep giving it gas until it goes.
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Now it’s December, and the U.S. is pinned under the shadow of the looming fiscal cliff and market participants are waiting for Washington to find a way to avoid the series of self-imposed spending cuts and tax hikes worth over $600 billion that, should they go into effect, could send the country into another recession.
In order to tackle the uncertainty and spur growth through 2013 and 2014, the Fed will have to launch a new offensive…