NEW YORK – The benefits of “operation twist” did not outweigh the perceived costs, according to Federal Reserve Bank of Dallas President and CEO Richard W. Fisher, therefore he voted against it at the last Federal Open Market Committee meeting.
Explaining that he is eager for greater job creation, Fisher told the Dallas Assembly, “I believe the foremost duty of any central banker is to ensure price stability. Indeed, I believe that the Fed cannot deliver on its congressionally mandated task of seeking full employment unless it delivers first on its mandated duty of warding off both inflation and deflation.”
Inflation is slightly higher than the Fed would like this year, but Fisher predicted it will drop to the 2% range that the Fed is comfortable with.
“While I remain on constant watch for signs of inflationary impulses, I believe the most urgent issue is job creation and the reduction of the scourge of unemployment,” Fisher said, according to prepared text of his remarks, which was released by the Fed. “I believe, however, that there is significant risk that the policies recently undertaken by the FOMC are likely to prove ineffective and might well be working against job creation.”
Fisher said the FOMC’s decision to “reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities,” since “spreads between mortgage-backs and Treasuries have been widening … was acceptable for me as a tactical way to provide limited assistance to the mortgage market at little cost.”
The common theme in his dissents, Fisher said, relates to “the efficacy of these initiatives.” The original “Operation Twist” cut 15 basis points from long-term Treasuries and between 2 and 4 basis points from corporate bond yields, while QE2 brought Treasury yields down about 20 points and cut investment-grade corporates 7 to 12 basis points. “The point is that the direct benefit of QE2 seemed small relative to the cost, including the complications arising from the expansion of our balance sheet and the stirring of suspicions among our critics that the FOMC is influenced too heavily by the financial interests that make more money from trading than from lending to job-creating businesses,” he said.
Fisher said his conversations with businessmen convinced him that Operation Twist may suggest further monetary accommodation is on the way and would spur the average citizen to save, not spend.
The plan would also add pressure to banks’ earning power, “by suppressing the spread between what they can earn by lending at longer-term tenors and what they pay on the shorter-term deposits they take in.”
Pension fund returns would have to be reassessed and greater reserves might have to be set aside, cutting funds from “investments stimulating job creation.”
Finally, Fisher said, “Expanding the holdings of the Fed’s book of longer-term debt would likely compound the complexity of future policy decisions. Perversely, the stronger the economy, the greater the losses the Fed would incur as interest rates rise in response and the prices of those longer-term holdings depreciate. The political incentive to hold rates down might then become stronger precisely when we want to initiate tighter monetary policy. This concern, of course, would be a good news/bad news issue: The good news is that it would stem from a stronger economy; the bad is that might hurt our maneuverability and, in doing so, might undermine confidence in the Fed to conduct policy independently.”
The answer? Fisher argued that it lies in “fiscal policy and regulatory reform that encourages the private sector to put to work the affordable and abundant liquidity” the Fed created. “Both within the FOMC and in public speeches, I have argued that until our fiscal authorities get their act together, further monetary accommodation¯be it in the form of quantitative easing or performing ‘jujitsu’ on the yield curve through efforts such as Operation Twist¯will represent nothing more than pushing on a string.”
Pushing for higher inflation is not the answer, Fisher warned, because there would only be a short rush to purchase before prices rose. “Once inflation becomes anticipated and ingrained¯as it eventually would¯then the stimulating effects are lost.”
