Stating the obvious.
For weeks, traders and market analysts have been discussing the possibility of the FOMC resurrecting Operation Twist. With the news last Friday that no new jobs were created in the last month, these discussions assumed a tone of inevitability. I suspect many market observers are underestimating the tension surrounding further ad hoc policy measures. I also believe that an Operation Twist redux would be an exercise in futility at best.
What was Operation Twist?
Operation Twist was a program executed jointly by the Federal Reserve and the (freshly elected) Kennedy Administration in the early 1960s to keep short-term rates unchanged and lower long-term interest rates (effectively "twisting"? the yield curve). The US was in a recession at the time, but Europe was not and thus had higher interest rates. Arbitrageurs (under the Bretton Woods system) would convert US dollars to gold and invest the proceeds in higher-yielding assets overseas (see Alon and Swanson, Operation Twist and the Effect of Large-Scale Asset Purchases). Billions of dollars' worth of gold was flowing into Europe each year. (Incidentally, President Kennedy announced Operation Twist on February 2, 1961, which basically corresponded to the business cycle trough.)
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