Operation Twist and the Yield Curve

There is a great op-ed in Bloomberg by Caroline Baum that discusses the implications of QE2 and other recent asset purchases made by the Fed.

Operation Twist refers to the last time the Fed tried (and failed) to manipulate the yield curve (the spread between the Fed's overnight rate and long term rates that are determined by the market) in 1961. 

As Baum indicates, the inverted yield curve from 2006-2008 provided a solid indication of what was to come.

One of the dangers of attempting to manipulate the yield curve is that these useful market signals might be artificially depressed.  This temporary yield curve effect distorts signals that might otherwise indicate meaningful economic changes (such as inflation) that are on the horizon.

Source: Bloomberg

Full Story