QE & Operation Twist

1. QE and Operation Twist Yifan Jiang BA 543-002 QE & Operation Twist Yifan Jiang

2. What is QE • Quantitive Easing - An unconventional monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. • Increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity.

4. What is Operation Twist • AFederal Reserve monetary policy operation that involves the purchase and sale of bonds. • Amonetary process where the Fed buys and sells short-term and long-term bonds depending on their objective. • In September 2011, the Fed performed Operation Twist in an attempt to lower long-term interest rates.

5. Operation Twist

6. Brief History of QE & Op Twist(1) • QE1: December 2008 to March 2010 • $600 billion in agency mortgage-backed securities (MBS) and agency debt • an additional $750 billion in purchases of agency MBS and agency debt and $300 billion in purchases of Treasury securities

7. Brief History of QE & Op Twist(2) • QE2: November 2010 to June 2011 • purchase $600 billion of longer dated treasuries, at a rate of $75 billion per month.

8. Brief History of QE & Op Twist(3) • QE3:September 2012 • an open-ended commitment to purchase $40 billion agency mortgage-backed securities per month until the labor market improves "substantially"

9. Brief History of QE & Op Twist(4) • QE4: December 2012 • authorized up to $40 billion worth of agency mortgage-backed securities per month, and $45 billion worth of longer-term Treasury securities

10. Brief History of QE & Op Twist(5) • Operation Twist: 2011 to 2012 • purchase $400 billion of bonds with maturities of 6 to 30 years and to sell bonds with maturities less than 3 years • an extension to the Twist programme by adding additionally $267 billion thereby extending it throughout 2012

12. Economic Impact (Bright side) • According to the IMF: • reduction in systemic risks following the  bankruptcyof Lehman Brothers • contributed to the improvements in market confidence and the bottoming out of the recession in the G7 economies in the second half of 2009 • Directly benefits exporters due to depreciated country's exchange rates versus other currencies. • keeps Treasury yields low • keeps mortgage rates low

13. Economic Impact (Dark side) • Risk of higher inflation or Hyperinflation • Harms importers as the cost of imported goods is inflated by the devaluation of the currency. • Skyrocketing prices (food, utilities, gas) • How much is needed

14. QE vs. QE MBS: mortgage-backed securities Agency debt:a security, usually a bond, issued by a U.S. government-sponsored agency. 

15. QE vs. Operation Twist (QE side) • QE - buys financial assets from bank to inject a pre-determined quantity of money into the economy • Instead of lending out money to public: • Stored at the Fed at an interest rate paid to the banks • Injected directly into the stock market

16. QE vs. Operation Twist (Op Twist side) • Op Twist – “Sell short, buy Long”, liquidate some of the shorter term Treasuries, and then buy in the longer end. • To lower long-term interest rates (to stimulate investment) while propping up short-term interest rates (to attract capital from abroad and support the dollar).  http://www.investopedia.com/video/play/quantitative-easing

17. References • http://finance.yahoo.com/news/goodbye-operation-twist-hello-qe4-142322818.html • http://en.wikipedia.org/wiki/Quantitative_easing#QE1.2C_QE2.2C_and_QE3 • http://www.investopedia.com/terms/m/mbs.asp