Operation Twist: Lessons for Australia from a US Monetary Experiment

When central banks want to tweak the economy, they usually cut or raise interest rates. But sometimes, they reach for more creative tools. One such tool was Operation Twist—a policy move that shook up the US bond market and left economists debating its legacy. In the face of ongoing global uncertainty, could Australia benefit from a similar strategy? Let’s unpack what Operation Twist was, how it played out, and what it might mean for Aussies in 2025 and beyond.

What Was Operation Twist?

Operation Twist refers to a unique monetary policy first used by the US Federal Reserve in 1961, and revived in 2011-2012 after the global financial crisis. Instead of simply adjusting the cash rate, the Fed sold short-term Treasury securities and used the proceeds to buy longer-term ones. This ‘twisted’ the yield curve by pushing down long-term interest rates while nudging short-term rates up or keeping them steady.

• Goal: Lower long-term borrowing costs to spur investment and housing, without adding more cash (liquidity) into the system.
• Result: Cheaper mortgages and business loans, but mixed effects on savings and the wider economy.

By contrast, quantitative easing (QE)—the more familiar post-GFC tool—involves buying bonds across the curve, flooding the system with money. Operation Twist was more targeted, aiming to influence rates without expanding the Fed’s balance sheet.

Why Does Operation Twist Matter for Australians?

Australia’s Reserve Bank (RBA) traditionally prefers to adjust the cash rate to influence lending, spending, and inflation. But with rates hitting record lows in recent years, the RBA has experimented with unconventional tools, including yield curve control (YCC) and limited QE. As global inflation cools but economic uncertainty lingers, policymakers are once again eyeing creative approaches.

• Housing affordability: Operation Twist-style measures can lower long-term mortgage rates, potentially easing the burden for home buyers.
• Business investment: Cheaper long-term borrowing can stimulate capital spending—vital for productivity and jobs growth.
• Superannuation returns: Lower long-term yields can squeeze returns for retirees and super funds, making portfolio diversification even more important.

With the RBA’s 2025 strategy review underway and the government considering new tools for economic resilience, Operation Twist’s targeted approach could become more relevant—especially if traditional rate moves lose their punch.

Global Lessons and Local Challenges

So, did Operation Twist actually work in the US? The answer is nuanced. Studies suggest it succeeded in lowering long-term Treasury yields by 0.15–0.20 percentage points, making mortgages and business loans more affordable. But its impact on broader economic growth was limited, partly because it relied on investor confidence and expectations rather than raw monetary stimulus.

For Australia, the lessons are clear:

• Communication is crucial: Markets respond as much to signals as to actions. The RBA would need to clearly explain any ‘twist’ to avoid confusion.
• Market depth matters: Australia’s bond market is smaller than the US, so large-scale buying and selling could cause volatility.
• Balance sheet risks: Targeted bond operations must be managed to avoid distorting credit markets or undermining financial stability.

In 2025, as Australia navigates post-pandemic recovery, climate transition, and global trade tensions, the flexibility to target specific parts of the yield curve could give policymakers more options. But any move must be weighed against the risks to savers, retirees, and the health of the financial system.

Operation Twist: A Tool for Uncertain Times?

Operation Twist remains a fascinating case study in central bank creativity. For Australians, it’s a reminder that monetary policy isn’t just about the cash rate—there are other levers to pull when the economy needs a nudge. As the RBA reviews its toolkit in 2025, expect more debate on how to keep borrowing affordable without stoking inflation or undermining long-term stability.