ALERT: Bernanke orders an Operation Twist QE Code Red

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.

The Fed is not just doing QE via Operation Twist, it is also throwing in some mortgage-backeds to up the ante a little bit.

QE all the way, baby! Take that, Eric Cantor. Take that, John Boehner. Take that, Mitch McConnell. Take that, Jon Kyl.

Do I have to get out the Nicholson clip again?…

OK I will.

Cantor: Governor Bernanke, did you order the code red?

President Obama: You don’t have to answer that question.

Bernanke: I’ll answer the question. You want answers?

Cantor: I think I’m entitled to them.

Bernanke: You want answers?

Cantor: I want the truth!

Bernanke: You can’t handle the truth! Son, we live in a world with depressions and those depressions have to be guarded against by men with balls. Who’s gonna do it, you? You, Speaker Boehner? You, Representative Kyl Boeher? You, Senator McConnell? I have a greater responsibility than you can possibly fathom. You weep for price stability and you curse the Federal Reserve. You have that luxury. You have the luxury of not knowing what I know – that the quantitative easing, while tragic, probably saved lives. And, my existence, while grotesque and incomprehensible to you, saves lives.

You don’t want the truth because deep down in places you don’t talk about at fundraisers, you want me against this depression, you need me against this depression. I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very freedom that I provide and then questions the manner in which I provide it. I would rather you just said thank you and went on your way. Otherwise I suggest you pick up a weapon and stand at post! Either way, I don’t give a damn about what you think you’re entitled to.

Cantor: Did you order the Code Red?

Bernanke: You’re goddamn right I did.

Conclusion: Don’t bully the Ben Bernank.


Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time.

Source: Federal Reserve Board

  1. gaius marius says

    edward, did you see this from krasting? an election-year mass refi that requires no congressional vote? Fed may have cleared the way for it by announcing MBS reinvestment.

  2. Edward Harrison says

    Bernanke is a Republican.

  3. diego says

    Excellent! This letter from Rep. leaders was utterly ridiculous anyway.

    However, can we consider this (potential) flattening of the yield curve as a specific QE move, as you suggest?
    Bank reserves at the FED shouldn’t be much affected, and the balance sheet of the FED wouldn’t change much…

    1. Edward Harrison says

      Whether its QE or not, it won’t have much effect on the economy. The Fed doesn’t have the tools. The whole thing was a non event except for the politics.

      1. David Lazarus says

        Agreed. QE is there only for the confidence fairy, as it has little or no impact on Main Street.

  4. Bernd says

    Hi Ed,

    maybe I misunderstood the movie or maybe I misunderstood your take on it. Are you advocating that Jack Nicholsons character should have gotten off for the crimes committed? Are you advocating that torture is ok?
    Or are you advocating that Cantor(in your example,more probaby Perry) is correct in calling him(Bernanke) out on a decision that, whilst seeming convenient currently, is ultimately incompatible with the rule of law?

    I don´t agree with either of these conclusions, but this pretty much seems to be the scope of your post.

    1. Edward Harrison says

      Sarcasm here. I am just playing a bit loose with this because it’s a non event economically. Sorry if my ambivalence blurs the lines too much.

      Perry and his congressional allies would have you believe Bernanke is Nicholson and is committing treason. That’s nonsense.

  5. Bernd says

    So if I got that right, you´re essentialy playing a bit loose with the general message of a movie that was shot well before Bush II´s time, the message of which was that torture and what at the time was considered measures incompatible with the constitution are to be successfully prosecuted, even via a military tribunal.
    You see it fit to play a bit loose with that because the Geneva Convention doesnt matter anymore? After the the Bush years and Obamas no prosecution, the clock has pretty much run out on these aspects? Nobody else really cares, so it´s okay to identify with the villians statement(just for fun)?

    Sorry, I really don´t mean to single you out, but I believe this scene does ask the basic question seperating the rule of law from expediency:”Did you order the code red?”.
    Your comment cheering that on does send the wrong message. Sorry.

    1. Edward Harrison says

      You sound pretty humorless. Clearly I don’t see it that way.

  6. Jim says


    Is there any “potential downsides” to what the Fed is doing – swapping out their shorter end treasuries for longer term treasuries? Over on the Market-Ticker.Org blog, it was mentioned that this “twist” can actually hurt bank earnings. (

    I guess what I’m asking in a roundabout way, will this “twist” actually accomplish anything whatsoever – good or bad? With the record/near-record low interest rates across the spectrum, I have great difficulty seeing everybody suddenly running out and leveraging themselves up (whether it be households or businesses) due to another 50 basis point drop in long term interest rates.

    Finally, is the Fed really about out of viable options now? I can’t help but wonder if they are doing this “twist” simply to say they are doing something (ok, and perhaps to annoy the Republicans, too :) ), despite suspecting that very little – if anything – will come from it.

    1. Edward Harrison says

      Hi Jim. Here’s what I think. They say they want to accomplish the following: “This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.”

      Put simply, the Fed wants to lower rates. The lower rates act in two separate ways. They lower net interest margins for banks and returns for savers. Simultaneously, they should increase the demand for credit. If the effect of the latter outweighs the effect of the former then this is good.

      There are some signs that the credit impulse is better than it has been but it is certainly not that good. Moreover, I think the price of credit (i,e, the interest rate) is not the deciding factor at the margin for whether credit demand increases.

      Bottom line: this is only going to move rates a few basis points. AND since the Fed is targeting quantity not price AGAIN, it’s not even clear that rates will decline. Rates are already so low that these basis points won’t make ANY difference. I see this as a non-event.

    2. Edward Harrison says

      Definitely there are downsides. You have the interest income channel balanced by the credit demand channel. In this environment, lower rates will have more impact on interest income and bank net interest margins. I think I was probably ahead of the curve in pointing this out last November:

  7. Demetri says

    But how can you call twisting the curve QE? The balance sheet isn’t expanding (minus reinvesting into MBS). I don’t see what flattening the curve does for the economy. If anything, it breaks the traditional business model of the bank. What am I missing here?

    1. Edward Harrison says

      You’re not missing anything.

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