Fed's "Operation Twist" has only minor effects: Fisher

CHICAGO Tue Jun 26, 2012 3:08pm EDT

Richard W. Fisher, President and Chief Executive Officer for the Federal Reserve Bank of Dallas, speaks on International Economics at the Council on Foreign Relations in New York, March 3, 2010. REUTERS/Shannon Stapleton

Richard W. Fisher, President and Chief Executive Officer for the Federal Reserve Bank of Dallas, speaks on International Economics at the Council on Foreign Relations in New York, March 3, 2010.

Credit: Reuters/Shannon Stapleton

CHICAGO (Reuters) - The Federal Reserve's recent move to push down borrowing costs by replacing its short-term securities holdings with longer-term ones is doing more harm than good, a top Fed official who opposed the action said on Tuesday.

The Fed last week decided to extend through the end of the year a bond maturity-extension program called Operation Twist, in which the central bank replaces short-term debt it holds with longer-term securities. Operation Twist had been due to end this week.

"My suspicion is Operation Twist is having a very minor effect and I have argued that the benefits do not exceed the costs; the costs exceed the benefits," Dallas Federal Reserve Bank President Richard Fisher told Fox Business Network, according to a transcript provided by Fox. "And that's why I personally didn't support the program. But I was in a minority."

Fisher, an inflation hawk, has been a staunch opponent of further Fed easing. Though he does not have a vote on the Fed's policy-setting panel this year, he participates in the committee's deliberations.

All but one voting member on the panel supported last week's extension of Operation Twist.

The Fed, which has kept interest rates near zero since December 2008 and has signaled it will keep them there until at least late 2014, has bought $2.3 trillion in long-term securities since the Great Recession.

Some economists had expected the Fed to launch a third round of outright bond-buying last week, and about half of Wall Street's top bond dealers expect it to do so in the future.

Fisher said he would oppose such a program.

"I would argue against it unless something comes up that I don't understand," Fisher said, according to the transcript.

"In practical terms, there's a limit to what we can do without distorting the marketplace," he said. "And that's a subject of much debate at the committee."

(Reporting by Ann Saphir; Editing by Jackie Frank)

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Comments (2)
trevorh wrote:
All the Nobel winning economists are at worst as smart as Fisher when half of his brain is in a coma and at best as smart as him when he goes on diet (yeap he does look chubby) and his brain runs in energy saving mode.

Jun 26, 2012 4:10pm EDT  --  Report as abuse
Macroboy wrote:
Zero nominal rates and negative real yields is not easy monetary conditions… it is tight! … Give me one reason why current yields are easy… and no you can not just say your economics 101 textbook says so.

As for “pushing on a string”, “leading a horst to water…”, “Paradox of thrift”, “National Savings…”, lets take a look at what may be going on, consider these two examples

1) Nominal rates of 5% and inflation of 2% … In this scenario I can imaging offering a principal + 2% guaranteed note where I use the +3% real yield to pay the premium for upside optionality on some asset or another.
2) Nominal rates of 0% and inflation of 2% … In this scenario I can not offer a principal guaranteed note. In fact, if I want the same optinality as in the previous example I would have to reduce my guarantee to principal – 3%. In real terms that means I would have to risk 5% of my capital to take the same risk as in (1)….

I will leverage myself under scenario (1), but I most certainly will not do so under scenario (2)… This is a totally rational decision will be copied by most investors. Furthermore, this example is a basic structure which many other leveraged investmens share. Under scenario (2) leverage will fall, investment activity will decline, velocity of money will dive, money supply will come under pressure and asset price deflation will be the norm…

Current policy is counter productive at best and destructive at worse… there is no paradox here, just rational choices being made in an irrational monetary policy environment.

Jun 27, 2012 7:30am EDT  --  Report as abuse
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