* Fed discussed replacing Operation Twist with bond buying
* Twist ends at year end; Wall Street sees more bond buying
* "Thresholds" could help Fed, but more work needed -minutes
By Alister Bull
WASHINGTON, Nov 14 A number of Federal Reserve
officials in October felt the U.S. central bank would need to
step up asset purchases in 2013 to fill the gap when Operation
Twist expires, according to minutes released on Wednesday that
hardened expectations the Fed will take such a decision next
The minutes of the U.S. central bank's policy meeting last
month also showed that officials looked favorably on the idea of
adopting unemployment and inflation "thresholds" to guide
expectations about when they would eventually raise interest
rates, but felt this needed more work.
Under the program dubbed Operation Twist, the Fed has been
selling short-term securities to buy $45 billion in longer-term
debt every month to push down long-term borrowing costs. The
program is slated to expire at year end.
"A number of participants indicated that additional asset
purchases would likely be appropriate next year after the
conclusion of the maturity extension program in order to achieve
a substantial improvement in the labor market," the Fed said in
the minutes of the Oct. 23-24 policy meeting.
Wall Street traders had already expected the central bank to
replace Operation Twist in 2013, and analysts said the minutes
simply provided another reason to expect a decision to do so at
the Fed's next meeting, on Dec. 11-12.
"This reference underscores the dovish bias at the Fed, and
it reinforces our base-case expectation for the Fed to continue
its current Operation Twist Treasury purchase profile beyond
December," Millan Mulraine, senior U.S. macro strategist at TD
Securities in New York, wrote in a note to clients.
HAWKS NOT SILENT
In addition to Operation Twist, the Fed is purchasing $40
billion in mortgage-backed securities each month in its third
and latest round of quantitative easing, dubbed QE3.
Unlike Twist, which swaps short-term debt with long-term
debt, QE 3 expands the Fed's balance sheet. Most analysts expect
any Twist replacement would do the same.
The Fed has turned to asset purchases and balance sheet
management techniques to try to give the U.S. recovery an extra
push since its main tool for influencing the economy -- the
overnight federal funds rate -- was dropped to near zero in
With the jobless rate at a lofty 7.9 percent, the Fed has
said it would employ its tools until the labor market improves
substantially, and it has pledged to keep an easy policy in
place even after the recovery gains traction.
Fed Vice Chair on Tuesday delivered a reminder of the
central bank's pro-growth tilt, saying that an optimal path for
policy indicated rates remaining near zero until early 2016.
At the Fed's October meeting, the chief of the Richmond
Federal Reserve Bank, Jeffrey Lacker, was the only policymaker
to vote against the decision to continue with monthly purchases
of mortgage-related debt. But the minutes made clear he was not
the only official worried about the Fed's aggressive actions.
"Several participants questioned the effectiveness of the
current purchases or whether a continuation of them would be
warranted if the recent moderate pace of economic recovery were
sustained," the minutes said.
The Fed has said it expects to hold rates near zero until at
least mid-2015, but several officials have suggested replacing
this calendar commitment with a set of economic variables, or
thresholds, that would signal when the time to raise rates was
"Many participants were of the view that adopting
quantitative thresholds could, under the right conditions, help
the committee more clearly communicate its thinking about how
the likely timing of an eventual increase in the federal funds
rate would shift in response to unanticipated changes in
economic conditions and the outlook," the Fed said.
However, it said a number of other officials believed a
qualitative description of what was driving the Fed's thinking
could be even more informative.
Yellen, in her speech on Tuesday, said she strongly
supported the idea of coming up with numerical guidelines. While
her influential backing showed the seriousness with which the
Fed was pursuing the idea, the minutes made plain that more work
"Participants generally agreed that the (policy) committee
would need to resolve a number of practical issues before
deciding whether to adopt quantitative thresholds," the minutes
Fed Chairman Ben Bernanke told staff to do more work on the