Just don’t call it QE3 . . . the Fed considers a “twist” to boost economy

Tonight the Washington Post is reporting on the Federal Reserve’s likely (or at least possible) decision in a couple of weeks to sell some of its shorter term securities and buy longer term ones.

So there wouldn’t be any additional money injected into the economy in the short run, thus perhaps/maybe/possibly shielding the Fed from some of the concerns over the first two rounds of quantitative easing (QE1 and QE2), which seemingly helped buoy stocks and lower interest rates.

The rationale for doing something is pretty straightforward, as the WashPo piece notes:

The willingness of Fed officials to embark on this effort to lower interest rates reflects their serious concern about an economy that is on a knife’s edge. Economic growth has been so weak in recent months that there is risk of a vicious cycle of falling incomes and employment — unless the Fed gives the economy a nudge.

In theory, if the Fed buys longer term securities, that will push more long term investors elsewhere — into the stock market, into mortgage backed securities (which would have the effect of reducing mortgage interest rates even more), or into corporate bonds (which would make it even easier for corporations to borrow and invest).

The WashPo adds:

The idea of shifting the composition of bonds the Fed already owns — sometimes known as a “twist” operation — is not without downsides, however. Interest rates already are very low, and pushing them down further may not have much effect. One major aim would be to encourage people to refinance their mortgages, freeing up money to spend on other things and foster economic activity. But with so many people owing more on their homes than the homes are worth, relatively few are in a position to take advantage of lower rates to refinance.

At the same time, by shifting from short-term bonds to longer-term ones, the Fed would face a greater risk of losing money when it is time to sell them. Just as for an individual investor, a 30-year bond is a riskier investment for the Fed than a two-year bond.

Frankly, even though I think QE2 had a pretty big effect, I’m not sure this move would be big enough to provide the kind of help the economy needs. Still, it might be the extra push needed to keep us out of another recession at a time when we haven’t come close to recovering from the one that technically ended in 2009.