QE & Operation Twist

Yifan Jiang

QE and Operation TwistYifan Jiang BA 543-002

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.

What is Operation Twist• A Federal Reserve monetary policy operation

that involves the purchase and sale of bonds.

• A monetary 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.

Operation Twist

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

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.

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"

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

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

Economic Impact (Bright side)

•According to the IMF:▫reduction in systemic risks following the 

bankruptcy of 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

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

QE vs. QEQuantity of Money

UsedTypes of Assets Purchased

QE 1 $600B + $750B + $300BMBS + Agency debt +

Treasury securities

QE 2 $600 billion Longer dated treasuries

QE 3Open-ended commitment

of $40B / month MBS

QE 4 $40 billion /month + $45 billion

MBS + longer-term Treasury securities

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

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

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

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