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After this week’s meeting of the Federal Open Market Committee, Fed Reserve Chairman Ben Bernanke announced a new package to help our flagging economy.
Dubbed “Operation Twist,” this new plan is supposed to stimulate growth, and its main goal is to reduce long-term interest rates (remember, low interest rates are supposed to encourage people to spend—here’s more on how that works).
Bernanke has also been concerned lately because mortgage rates haven’t fallen as much as they could, preventing a lot of homeowners from refinancing their home loans. Last year, the Fed had decided to shift its attention (and portfolio) away from mortgage debt because the economy was improving … but now they’re reversing that decision, which is a sign that the economy isn’t getting better as fast as they thought.
How Operation Twist Will Work
- The Fed will take on more long-term U.S. Treasury bonds and mortgage debt than it planned before; this will keep rates low, which will encourage people to spend, invest and buy homes.
- The Fed’s portfolio will shift more toward long-term securities, so it will sell off $400 billion in short-term Treasuries in order to exchange them for more long-term ones.
- It’ll invest more in mortgage bonds to, as The Wall Street Journal puts it, “provide a shot of adrenaline to the beleaguered housing sector.”
… And Both Sides of the Aisle Disagree
At this point, it shouldn’t be surprising that there’s wide disagreement about the correct course of action. Republican presidential candidates have been consistently criticizing the Fed, and many Republican politicians have been protesting that the central bank shouldn’t take any more action. On the other end of the spectrum, some Democrats think that it isn’t doing enough, according to The New York Times.
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So, What’s Next?
As part of its general view on the economy, the Fed said that there are still significant risks in our current economic outlook, “including strains in global financial markets.” And, according to a poll The Wall Street Journal conducted, many economists think there is a one in three chance that America will slip back into a recession over the next year … “the highest odds since the recovery began in mid-2009.”
In a nutshell, things aren’t looking good. Paired with a big stock slide yesterday and on Wednesday (read this for more on the market sinking), this news has and will continue to make people nervous.
What This Means for You
We’re not gonna lie—things are scary in the world right now. But what we can tell you is that, no matter how much we try to outsmart our own psychology, humans have the bad habit of buying high and selling low. Even when they try not to.
So, when you see gold rising because everyone is getting spooked (here’s more on how and why that happens), that doesn’t mean you should buy in while the price is surging. When you see everyone selling off their investments, it also doesn’t mean you should sell your portfolio.
We've said it before, but we’ll say it again: Investing is about your future, not about trying to outsmart the world economy. It’s a long-term process, so we don’t recommend day-trading or trying to cash in on ebbs and flows. The markets nowadays are more volatile than ever—and may stay that way permanently—so the best course is to remain steady when nothing else is.