JACKSON HOLE, Wyoming (Reuters) - A bid by the U.S. Federal Reserve to lower long-term interest rates further by rebalancing its portfolio would probably not have much impact, a top Fed official said on Thursday.
Fed Chairman Ben Bernanke is expected to raise the possibility of adjusting the Fed’s balance sheet to weight it more heavily with longer-term securities in a widely anticipated speech Friday in Jackson Hole, Wyoming. Central bankers and leading economists from around the world are gathered in this mountain valley for an annual meeting hosted by the Kansas City Fed.
A strategy aimed at lowering longer-term borrowing costs, sometimes referred to as a twist operation, would help drive down longer-term borrowing costs for businesses, economists say.
But James Bullard, president of the St. Louis Fed, said the effectiveness of such a strategy is questionable.
“A twist operation would not have very much effect,” Bullard told Reuters Insider in an interview. “It’s been analyzed many times, and the general tenor of that analysis is that it did not have very much effect.”
Bullard said another concern about loading up on longer term Treasuries is that it would make it harder to shrink the balance sheet when the Fed was ready to tighten financial policy.
“It would complicate our exit,” he said.
Bullard, who is seen as a policy centrist on the spectrum of inflation-focused hawks and growth-centered doves, said the U.S. central bank has better alternatives. Chief among them is bond-buying, which most at the Fed believe is effective at easing monetary conditions.
The Fed cut benchmark short-term interest rates to near zero in December 2008 and has since bought $2.3 trillion in long-term securities to further bolster the economy. Earlier this month the Fed’s policy-setting panel signaled it was likely to keep rates on hold for the next two years because of a recovery in which downside risks are on the rise.
Bullard, who is not a voter on the Fed’s policy-setting panel this year, said the Fed would need to take further steps to boost growth if weak growth peters out.
“A lot of analysts are marking down their forecasts and if things get worse, especially if a deflationary scenario would reappear, then the Fed would be ready to act, at least I’d be ready to act.”
Bullard, however, said he would have dissented on the Fed’s August 9 decision to freeze short-term rates until mid-2013 because he believes central bank policy should be adjusted as new data comes in.
“Policy should be made according to the state of the economy, not the state of the calendar,” Bullard said.
Setting a date certain boxes the Fed in, he said.
Bullard also said he thought the Fed’s decision to move directly from the end of the $600 billion bond buying spree that ended in June to a fresh commitment to a period of rock bottom rates might have been a bit hasty.
“I would have preferred in this case on how second half was developing,” he said “We had a lot of turmoil right around the time of the meeting, and my preference is to let the dust settle.”
Reporting by Mark Felsenthal, Writing by Ann Saphir; Editing by Leslie Adler, Gary Hill