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Operation Twist and the 2012 Election

The biggest financial story today is that the Federal Reserve announced it will start Operation Twist, an effort to boost the economy by lowering long-run interest rates. Given that the state of the economy is almost guaranteed to be what defines the 2012 election, this means the announcement is also the biggest political story of the day. From the Federal Reserve’s press Release (my bold):

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

[…]

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate.

The size of the Fed’s action is slightly larger than the market was expecting but nowhere near as large, creative or employment focused as some economists believe the economy needs. The Fed made it clear it could theoretically do more to promote economic growth.

My take as a non-economist is that this move is large enough it will probably reduce the likelihood of the American economy experiencing a big sudden downward movement that could potentially really shake up our politics and/or even force Congress to take serious action. On the other hand it is likely too small to produce a level of economic growth consistent with what an incumbent president traditionally needs to win re-election.

So far it looks like Ben Bernanke isn’t going to save Obama’s re-election.

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Jon Walker

Jon Walker

Jonathan Walker grew up in New Jersey. He graduated from Wesleyan University in 2006. He is an expert on politics, health care and drug policy. He is also the author of After Legalization and Cobalt Slave, and a Futurist writer at http://pendinghorizon.com

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