mortgage backed securities

On September 21 the Federal Reserve Board (FRB) announced that it would undertake further monetary stimulus in an attempt to revive the staggering economy. The FRB made the announcement after their Federal Open Market Committee (FOMC) meeting, one of eight such meetings held each year to set monetary policies in accordance with the FRB’s “dual mandate” of fostering maximum employment and price stability. To achieve these goals, the Board has a number of policy tools at their disposal, aimed at lowering long- and short-term real interest rates, rates on U.S. Treasury securities of varying maturities, and conventional mortgage rates. Since December 2008, the central bank has purchased $2.3 trillion in longer-term Treasury securities, agency debt, and mortgage-backed securities in an effort to lower longer-term interest rates, including mortgage rates.

Their most recent action is called “Operation Twist,” named after the dance “The Twist”, a dance popular when an operation of comparable mechanics was first (and last) utilized by the central bank. Under Operation Twist, the FRB will purchase $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and sell an equal amount of Treasury securities with remaining maturities of 3 years or less by the end of June 2012. In their notes, the FRB says Operation Twist is an effort to push long-term interest rates down and encourage lending, especially when it comes to home loans. By reducing the supply of longer-term Treasury securities in the market, this action should put downward pressure on longer-term interest rates.

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