In the early 1960s, a new dance craze gripped the nation: The Twist. Youngsters stopped slow dancing and started “twisting the night away.” At the same time, the American economy was slow dancing too and The Twist sounded like just the thing to get the economy moving.
Flash-forward to 2011, the economy has slowed again and the Fed is out of new dance moves. This has given rise to new talk of “Operation Twist,” a strategy used in the 1960s to spark a similarly stalled economy.
Understanding the details of Operation Twist is not terribly important to you the consumer. However, knowing how it might affect your finances and what you should do to give yourself a little personal financial stimulus, on the government, is a very smart, money-making move.
Let’s get a little background and understand what’s in it for the government so we can map our own Operation Twist plan.
What is Operation Twist?
The Federal Reserve is the central bank of the United States and as such is responsible for maintaining the stability of our financial system. The Fed is focused on maximizing employment, stabilizing prices, and moderating long-term interest rates.
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Operation Twist is a strategy that focuses on lowering long-term interest rates in hopes of stimulating employment and keeping prices low.On Wednesday, the Fed announced a policy to cash in their investments in medium-term securities (2-year Treasuries) and invest in long-term securities (10-year Treasuries). The goal is to hold down long-term interest rates for the next couple of years. This is something promised by the Fed several weeks ago, but now we know the strategy.
You might have questions about what short- and long-term securities are or how they affect interest rates. In the interest of getting to the meat of the matter, I’m going to skip the explanation and give you the punchline:
The Fed is going to force interest rates to stay low until the economy restarts.*
(*Of course, there are no guarantees in life or with independent Federal Reserve Boards.)
Why the Twist?
We know what the twist will do – twist short-term interest rates and long-term interest rates. This means your credit card rates (short-term) are headed up and your mortgage rates (long-term) are headed down.
That’s pretty alarming if you are paying credit card debt at the current average rate of 15 to 16 percent.
Why is the Fed doing this twist in interest rates to potentially drive up short-term rates and drive down long-term rates?
- To give businesses low interest rates to start investing again;
- To turn those investments into business and economic growth;
- To generate sufficient growth to restart the job market.
How to Do the Twist
Now for the important part… How do you do your own Operation Twist?
- Lower your monthly mortgage payment. If you have a mortgage, you’re getting another opportunity to refinance into a lower mortgage rate. Use your monthly savings to pay down rising-rate credit card debt or chip into the economic recovery and buy stuff.
- Think about a new home. The Fed just opened the window of opportunity to get lower mortgage rates and affordable homes. For those of you with debt, poor credit, or who lack a down payment, the Fed just gave you more time – proceed to steps three through five.
- Pay down your debt. Map out a plan to start aggressively chipping away at your credit card debt, as it’s only going to get more expensive. Set goals and spend only what you have to avoid rising credit card interest rates.
- Work on improving your credit. This move by the Fed has opened a much larger window to invest in your future financial growth. Like businesses, lower long-term interest rates mean that you can get affordable financing for smart investments, like a new home. However, you need a good credit score to get the good deal. Now you have more time to fix your credit and still get a low rate mortgage and affordable housing prices.
- Start saving. Have you looked at the current rates on savings and CD accounts? You’re hard pressed to get 1 percent. That is probably about to change. In the early 1970s, after the last Operation Twist, savings interest rates were in double digits. How nice would it be to get that kind of interest on an FDIC-insured savings account?
Operation Twist is a political football right now and no one is sure it will kick-start the economy. However, it’s likely to twist interest rates in your favor. Following the plan above can finally give you a little cash from a federal stimulus program.
What is your personal financial goals for the rest of 2011? Do you have smart money ideas in this economy? I’d love to hear them in the comments.
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