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After a two-day meeting of the Federal Open Market Committee (FOMC), the Fed is dipping back in to the proverbial playbook and taking a page out from the Kennedy Administration by implementing what has been dubbed as “Operation Twist.”

Fun side note before the details: The 1960s version of Operation Twist actually got its name from the popular dance craze based off of the Chubby Checker song “Let’s Twist Again.”  Ah, so much fun.  Now, back to the nitty gritty stuff.

The premise behind Operation Twist is simple.  The Fed has acquired around $1.65 trillion in federal bonds, which in essence, are loans to the government.  The duration of how long these bonds will mature varies from as little as a year to as much as 30 years.

Operation Twist’s goal is to trade short-term bonds for long-term bonds to drive up demand, and in turn, lower interest rates (now the name probably makes sense).  After that, the snowball effect will begin with a decrease in interest rates on car loans, mortgages and more.

Additionally, a growing understanding is that the Fed wants to drive rates low enough that investors would seek out higher returns and thus, foster business investments.

The Fed is also planning to keep the target range for the federal funds rate at 0 to .25 percent.

Still with me?  Take a deep breath, now come back to me.

So the big elephant in the room (disregard the corny cliché) leaves us all wondering when will Operation Twist take place and will it save the day?

The “when” is easy to answer.  The committee is shooting to purchase $400 billion in Treasury securities that have six to 30 years remaining, and sell an equal amount with remaining maturities of three years or less by June 2012.

The “will” is a little trickier.  Although Operation Twist was unsuccessful in the 1960s, it is important to remember that we are living under completely different financial times.  The general consensus among financial analysts is that it will help, but it lacks the potential to create a dramatic change.   Think of it as putting a band-aid over a gun shot wound – it can stop the bleeding for a little bit, but it doesn’t have the ability to completely heal the wound.

Did I really just use two corny clichés in a matter of three paragraphs?

We’ll have to wait and see how this one unfolds as it has the potential to bolster the economy.  Check out Zing for all the important updates!

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