Stephen Foley: A sticky time for Fed's Operation Twist

US Outlook: The day after the Federal Reserve announced its latest attempt to boost the US economy, Operation Twist, the central bank released a study which explains why it won't work. The financial crisis began in the US housing market, and recovery from the subsequent recession will not be complete until the housing market is finally healed, no matter what jiggery-pokery the Fed performs.

Operation Twist involves stuffing the Fed's balance sheet full of long-term government debt, the sort of 30-year bonds that most affect what banks charge for mortgages, and a new load of mortgage-backed securities. By buying these types of debt instruments, the Fed is hoping to push down mortgage rates. This is the traditional transmission mechanism for monetary policy: it allows homebuyers to get cheaper loans and existing owners to refinance at lower levels, making consumers richer, happier and more likely to hit the shops.

Not this time. A Fed study of mortgage data, released on Thursday, found that refinancing activity last year fell far short of what would have been expected, given the historic falls in interest rates generated by its ultra-loose monetary policy. The study even put hard numbers to it. All things being equal, you would have expected 6.8 million refinancings in 2010; in fact, there were only 4.5 million.

Crunching the data, the authors confirm what you might suspect. The wipeout of home equity for millions of Americans has made it much harder for them to refinance, at the same time as banks have become more cautious about who they lend to. Someone with a middling credit score who was a shoo-in for a loan before the crisis, no longer is. Banks are looking to the sluggish economy, the unemployment risk and predictions of renewed house price falls and deciding not to lend.

Operation Twist, like quantitative easing before it, has been text-book successful in reducing market interest rates. Long-term government debt in the US is yielding less than it has at any time since the 1940s. Successfully getting low-cost money into the hands of consumers, though, is another matter.