Fed's 'Twist' gets mixed fiscal reviews

Operation Twist doesn't give consumers much to shout about.

The Federal Reserve's latest effort to boost the economy by driving down long-term interest rates won't have a big impact on home and car buyers, savers or credit card users.

Any noticeable changes from the central bank shuffling $400 billion of its portfolio are likely to be mixed. Although borrowers may benefit from lower rates on mortgages and other fixed-rate loans, savers holding long-term bonds are likely to see their interest income dip.

The stock market's skeptical reaction reflected the limited outlook for the program's impact. If the Fed's move spurs the economy, investors could see portfolios climb. But the initial response of investors was a sell-off, partly because of the Fed's suggestion that the economic slump could last for years.

A look at how consumers may be affected in various categories:

Mortgage rates: The Fed intends to sell $400 billion of its shorter-term Treasurys to buy longer-term ones by June 2012. And it will reinvest principal payments from its mortgage-backed securities to help keep mortgage rates low. These steps alone won't spur a housing boom.

Interest rates already are at the lowest level in six decades, averaging 4.09 percent on a 30-year fixed mortgage and 3.29 percent on a 15-year fixed.

Prospective home buyers aren't putting off home purchases because rates are too high. They're holding off because they're lacking confidence. Others see no reason to jump into the housing market when prices are still falling. Still, the Fed hopes to at least stimulate more refinancing activity.

Consumer debt: Most credit cards have variable rates that are tied to the prime rate. So consumers can still take some comfort in the Fed's August pledge that it plans to keep interest rates very low until at least mid-2013. But credit card rates aren't expected to get any lower because of Operation Twist, and if it fails to improve the limping economy, they could even rise.

That's because the prime rate and federal funds rate don't necessarily move in lockstep. From the consumer standpoint, borrowers will benefit only from better rates on longer-term loans: fixed-rate mortgages, fixed-rate home equity loans and, for entrepreneurs, fixed-rate small business loans.

Short-term savings: Savers who have been earning next to nothing on their money may see slight improvements.

Operation Twist should push up short-term interest rates for money-market accounts "from next to zero to something that isn't quite as bad," says James Angel, associate professor of finance at Georgetown University's McDonough School of Business. But that's not assured. The Fed's reshuffling of debt may well have the unintended consequence of making it harder for banks to make money from lending, some say. If that happens, banks will be less willing to pay as much on consumer deposits.

Long-term bonds: By buying long-term Treasurys, the Fed aims to drive the rate of those securities down. That means investors in long-term bond funds who sought to play it safe and pocket reliable income could see less of it. Likewise, the cost of insurance could rise. Lower rates would be bad news, particularly life insurers that hold much of their investment portfolios in long-term bonds. If their investment returns drop they could compensate by charging consumers more.

But neither impact should be drastic. Long-term interest rates aren't expected to come down more than 0.2 percent point in the wake of Fed action.

Stocks: Analysts say the plan could raise stock prices by boosting confidence and helping borrowers. But Fed boss Ben Bernanke can only dream of providing the market with anything close to the 28 percent rally that took place over the months following last fall's second round of quantitative easing, or QE2 -- a $600-billion program to buy government bonds.