Goal of Fed’s Operation Twist

The stocks of banks have been unpredictable since the Federal Reserve’s announcement to push the interest rates lower in the long run. On the positive side, “Operation Twist” is created to stimulate loan growth, a challenging aspect in their operations as a result of the recession. At the same time, most financial institutions have been hesitant to provide loans while they are trying to improve their balance sheets that are affected by the real estate collapse in 2008.

According to the Fed’s statement, the economy is slowly growing, the rate of unemployment is high and the housing market is continuously collapsing. The central bank provided a statement saying that the goal of operation twist is to lower the borrowing cost of consumers and businesses together with the price of mortgage loans. It expects the lower rates to entice companies to construct new factories and hire additional employees. It also anticipates consumers to begin spending their money for purchasing cars, homes, clothes as well as for traveling.

In the past quarters, main banks have started to show credit quality improvements. More careful credit checks have resulted to lesser loan delinquencies and higher financial stability. With this, banks are allocating less money to spend for bad loans and some are observing the decrease in loan losses. While the quality of credit gets better, the increasing unemployment rate has been adversely affecting the long term growth of banks’ loans.

Operation Twist also comes with controversies. Richard Fisher, Federal Reserve Bank of Dallas’ President said that he is against the recent attempts of the Fed to stimulate the growth of the economy fearing that it may not work, intimidate consumers and constrict bank earnings. He added that Operation twist may be counterproductive. Consumers might think that the Fed believes that the economic condition is much worse than they perceive which may encourage them to store money, said Fisher.

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