I will just copy the entire post by Krugman in his blog, because it puts “Operation Twist” in perspective. The link to Krugman’s blog entry is given at the end:
September 22, 2011, 9:30 AM
Meh — And I Mean That
OK, the Fed moved. It was a bit stronger than expected — and BB and company stood up to the GOP.
But seriously, they’re trying to use a water pistol to stop a charging rhino.
Conventional monetary policy operates by changing the supply of monetary base, which is a unique, uniquely liquid asset. Increase the supply of green pieces of paper with pictures of dead presidents, and you start a hot-potato process in which people try to get out of that asset into higher-yielding but less liquid assets, interest rates fall all along the curve, and big real things can happen.
Right now, however, people are holding monetary base at the margin simply for its role as a store of value, so conventional monetary policy doesn’t do anything. The Fed is therefore trying to operate on a different margin, swapping short-term for long-term securities. The trouble here is that it’s not at all clear that this has much traction. To a first approximation, long-term interest rates are determined by expected future short-term rates, and if that were the whole story, the Fed would be accomplishing nothing at all.
Now, to a second approximation, risk plays a role; and what the Fed is trying to do is play on the margin created by the difference between the first and second approximations. OK. But we’re talking about very big markets here. Total nonfinancial debt in the US is around $36 trillion, and the Fed is talking about shifting $400 billion of that total from short-term to long-term assets. How much effect can that have?
The main way in which unconventional Fed policy can work is by changing expectations — especially expected future inflation. And that’s not happening. In fact, expectations of inflation over the next 5 years have been falling fast:
So kudos to the Fed for defying the right’s threats, and I guess this is better than nothing. But is it remotely enough? No.