Chart of the Day: Operation BRIC Twist

Get a load of this blog post from the Council on Foreign Relations:

On September 21st the Fed announced that it would be selling $400 billion in short-term Treasurys and buying $400 billion in longer-term Treasurys to replace them – a maneuver titled “Operation Twist.” Atlanta Fed president Dennis Lockhart explained what it would mean for the economy: “It means lower interest rates – a lower cost of borrowing – across a whole spectrum of loan maturities.” Is he right? Well, China, Russia, and Brazil have conducted their own version of Operation Twist over the past several years, replacing roughly $330 billion in short-term Treasurys with long-term ones. The 10-year Treasury rate went sideways over that period, as shown in the figure above. Whereas the BRIC* Twist may have put some modest downward pressure on longer-term rates, other factors overwhelmed it. Don’t expect much from the Fed’s similar-sized version.

* There are no reliable data for India.

Here was my take when Operation Twist was announced:

Put simply, the Fed wants to lower rates. Lower rates have two distinct transmission channels (outside of simple animal spirits and private preferences aka the Bernanke put). First, low rates lower net interest margins for banks and returns for savers. Simultaneously, they should increase the demand for credit by lowering the price i.e. the rate of interest. If the effect of the latter outweighs the effect of the former then this policy is good in generating more credit demand and therefore more economic activity and jobs.

There are some incipient signs that the credit impulse is better than it has been and that credit is growing again. But it is certainly not that good. However, with the Fed Funds rate at effectively zero percent, the price of credit (i.e. the interest rate) is not driving the marginal consumer of credit. It is the lack of jobs and unanticipated asset price volatility juxtaposed to an overhang of large levels of household sector debt. Consumers, therefore, can neither count on income or wealth gains to deal with their accumulated indebtedness and have cut back as a result. Until this indebtedness is worked down, credit growth will be stalled.

Bottom line: Operation Twist can only 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, a big fat yawn. It’s not treason at all. It won’t even be effective.

So has Operation Twist been effective? It doesn’t look like it to me.

Source: The BRIC Twist Didn’t Work – CFR

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