Here are the options, with 'Operation Twist' gaining steam. QE3 seems like it will come later down the pike - woo hoo. Just like stimulus is now an annual event, it appears so will unconventional means of monetary easing. With gas at $3.85 locally, I can't wait for the full QE3 later this winter!
- Federal Reserve officials are considering three unconventional steps to revive the economic recovery and seem increasingly inclined to take at least one as they prepare to meet this month.
- One step getting considerable attention inside and outside the Fed would shift the central bank's portfolio of government bonds so that it holds more long-term securities and fewer short-term securities. The move—known to some in markets as "Operation Twist" and to some inside the Fed as "maturity extension"—is meant to further push down long-term interest rates and thus encourage economic activity. The program draws its name from a similar 1960s effort by the U.S. Treasury and the Fed, in which they tried to "twist" interest rates so that long-term rates were lower relative to short-term rates.
- Anticipation of the move—along with grim economic news and the Fed's public plan to keep short-term interest rates near zero through 2013—has helped push yields on 10-year Treasury notes, above 3% in late July, to around 2%.
- A second step under consideration at the Fed, one getting mixed reviews internally, would reduce or eliminate a 0.25% interest rate the Fed currently is paying banks that keep cash on reserve with the central bank.
- The 0.25% payment is greater than the 0.196% rate an investor can get on a two-year Treasury. Some officials believe the Fed shouldn't reward banks for holding cash instead of making loans
- A third step Fed officials are debating would involve using their words to make their economic objectives and plans for interest rates more clear. Some officials felt the Fed's August pledge to keep rates low until 2013 wasn't specific enough about what was driving its thinking. They want the Fed to say what unemployment rate or inflation rate would trigger it to boost rates.