This June, the Federal Reserve might play again the sweet symphony of ‘Operation Twist’, as their broken drums are beating loud, in the US economy at a meeting that will be held on June 19-20,  thus providing a new dimension to the economy in its policy announcement.

The Federal Reserve has played the symphony of Operation Twist two times previously. On November 25, 2008, the Federal Reserve announced that it would purchase up to $600 billion in agency mortgage backed securities and agency on debt, and the Fed Launched this measure once again in 2011. Under this plan the Fed announced that it was going to purchase $400 billion in securities with maturities between 6 and 30 years.

The basic idea behind Operation Twist is to lower the interest rates in order to increase more avenues for consumers and businesses to borrow and to ultimately increase spending.

After almost six months of a bumpy ride with unemployment numbers lacking signs of improvement and ailing GDP numbers, all focus has shifted back toward the monetary authorities.

Recently the Fed’s Beige Book, called the Summary of Commentary on Current Economic Conditions, concluded that overall economic activity showed some signs of improvement in April to late May. However, there have been growing worries about the weakness of the US recovery underlined by recent lower-than-expected growth in job numbers. Federal Vice Chairman, Janet Yellen, described an economy endangered by marginal  job growth, a weak housing market and the specter of problems in Europe.

“There are a number of significant downside risks to the economic outlook, and hence it may well be appropriate to insure against adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest,” Yellen told an audience at the Boston Economic club.

In the corridors of economic growth and stability, performance of the US economy in the first half might be regarded as lacking prospects of probability and consistency because the US Federal Reserve lost of all its ammunition by playing the flutes of record low interest rates, defending some of the worst economic battles.

The US economy was able to grow at only a 1.9 percent annual rate in the first quarter of 2012  and  it seems it is not expanding any more quickly this quarter either, sparking concerns over recovery. 

Now all of the attention is orbiting in and around the Fed, since it appears that streamlining the economy can be easily done by the Fed, as well as the transformation of the economy toward a brighter and more secure future. This is evident by a previous line of action by the Federal Reserve when they first launched Operation Twist.

Quantitative easing will provide limited, time-bound quasi relief to the economy because the scale of the crisis serves as an exclusive illustration that the mere reliance on monetary policy adjustments won’t help the US get out of their noisy mess of broken drums and defective flutes.  What is needed is, no matter what happens in Europe due to the Sovereign debt crisis, the US should start off consistently with collaborative action from both fiscal and monetary spheres to rejuvenate the economy.

According to the BBC, Mr Bernanke, Chairman of the Federal Reserve, echoed grim concern about tax policy adopted by the government and further said that it might jeopardize economic growth, pointing to the so-called fiscal cliff, and legislation that could bring a steep fall in government spending alongside rising taxes, which is a move hated by most economists.

In a poll of Economists conducted by Reuters, 42.5 percent believed that the Fed may extend the Operation Twist program in June, and 45 percent said it might eventually embark on more quantitative easing. Reactivation of business rhythms and the loud consumer chorus is greatly dependent on fiscal policy and monetary policy aid. Adjustments are possible in terms of tax reforms and deficit-reducing plans, and on the monetary side, restarting Operation Twist largely depends on evidence of success in earlier such programs.

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About the author

Muhammed Faraaz
Post-graduate in Economics from India, unfolding complexities and policies. Proponent of Classical Economics.