Fed's Likely Response to Bad Jobs Report: Operation Twist

The Federal Reserve will respond to Friday’s brutal jobs report by announcing a so-called Operation Twist—the purchase of longer-dated Treasurys and simultaneous sale of short-dated Treasurys—after its next policy meeting, economists from Goldman Sachs and other firms said.


A third round of the politically stigmatized quantitative easing is likely still off the table for the two-day meeting ending Sept 21, but a ‘QE3’ could be put in place in November, the economists said.

“Following today’s worse-than-expected jobs report, we now look for the FOMC to announce a lengthening of the average maturity of the Fed’s balance sheet at the September 20-21 meeting,” wrote Jan Hatzius, Goldman’s chief U.S. economist, in a note to clients immediately following the payrolls report.

The country added no jobs in August and fewer than previously thought in July, according to the Labor Department Friday. The Dow Jones Industrial Average plunged more than 200 points initially following the report.

The Fed would purchase Treasurys with maturities of 10 years or greater in an attempt to keep longer-term rates lower. The thinking behind the maneuver is to give investors and corporations longer-term certainty and hit directly at the rates linked to consumer loans like mortgages.

“The FOMC will probably consider an ‘Operation Twist’ and cutting the interest rate paid on excess reserves in September,” wrote Don Rissmiller, chief economist for Strategas, after the report. “There’s still an inflation concern that likely keeps Fed QE3 on hold (for now).”

The move dates back to 1961 when it was put into action by President Kennedy and then-Fed Chief William Martinin order to stop a massive outflow of money out of the U.S. to Europe. It was nicknamed after singer Chubby Checker’s dance craze of the day.

Unlike quantitative easing, the move does not expand the Fed’s balance sheet because it uses the proceeds from selling the short-dated securities to buy the long ones. The last QE, which ended in June, was concentrated on the center of the yield curve .

The market Friday seemed to directly signal this move was ahead as 10-year and 30-year yields decreased, and yields for bonds with maturities less than two years increased.

“If Ben Bernanke cannot convince committee members to take action on September 21, we may have to wait for the November 1-2 meeting for ‘QE3,’” said Jason Schenker of Prestige Economics, in a note. “The pressure on the President and other politicians in Washington in the wake of this report is going to be massive. As such, and given that fiscal policy options are locked up as we roll into an election year, Ben Bernanke and the FOMC will come under tremendous pressure to act.”

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