Fed: Low Interest Rates For Two Years

Jun 20, 2012 12:49pm

The Federal Reserve will be extending its plan called “Operation Twist” which was set to expire at the end of the month, till the end of the year.

The Fed’s program sells short-term treasuries and replaces them with purchases of longer-term bonds.

“It sends a signal but will likely have limited fundamental impact,” said Guy LeBas, managing director of fixed income strategy at Janney Capital Markets about the Fed’s extension of Operation Twist.

The Fed reiterated that it is hoping to preserve low long-term interest rates through the end of 2014. The currently low interest rates are meant to encourage people and businesses to borrow and spend.

For the average person this is felt most clearly in the mortgage refinancing market.  As mortgage rates plummet to historic lows, people with good credit and enough equity have been refinancing their mortgages at lower rates.  This gives them access to more money to spend elsewhere.

This is the least controversial move the Fed could make since it will be selling assets it already has, rather than increasing the size of its balance sheet — in a way, printing money.

The criticism remains though that this Fed policy is helping those who already have money with no help for people with more dire problems.  Some would argue that the Fed is doing all it can and the rest is up to the Congress and the president.

The Fed also said it is ready to take further action if needed.

 

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