NEW YORK – “Operation Twist” will have a modest impact, according to Federal Reserve Bank of Atlanta President and Chief Executive Officer Dennis P. Lockhart.
“The transmission mechanism for monetary policy remains somewhat impaired, and for this reason I am not expecting large gains from the Fed's most recent action,” Lockhart told a conference in Jacksonville, according to prepared remarks released by the Fed. “I think it's realistic to expect modest positive impact from this program.”
He said he see the maturity extensions and mortgage-backed repurchases are “a measured, incremental attempt to add more support to the recovery. It's not a fix for everything that ails the economy, but it should help.”
He added, “I think the recent decisions to adjust the composition of the Fed's securities holdings should be seen as augmenting a total stance of policy intended to promote recovery and facilitate necessary adjustment. In my view, this policy action is not just one more thing tried in a series of stand-alone attempted remedies for the weak economy. Instead, I believe the potential of the latest policy actions should be assessed on a composite basis together with elements of policy already in place, which include previous large-scale asset purchase programs, a conditional commitment to keep the federal funds rate in the 0 to 25 basis point range at least through mid-2013, and maintaining the overall size of the Fed's balance sheet. The power and sufficiency of these efforts should not be evaluated individually but as a cumulative total policy of support and accommodation.”
The FOMC’s decision, he said, “should be taken neither as signaling further action on the part of the Fed nor conveying that ‘we're done.’” The direction of policy going forward will depend on how economic circumstances and the outlook evolve from here.”
Going into the meeting, Lockhart said, he was concerned by “the persistence of high unemployment” as well as “the complicated internal dynamics of the current labor market.” Especially, determining the degree that “structural factors” play in “impeding the filling of job vacancies.”
“The trend and complexion of inflation data” also concerned Lockhart. “Inflation has trended higher for a longer period than I expected.”
“I accept the premise that there is no tradeoff in the long run between the two policy objectives expressed in the FOMC's dual mandate,” he said. “The best environment for achieving and sustaining full employment is one of price stability. However, it's plausible (and again, these are my personal views) that the forces shaping economic performance at the moment create some tension between these two objectives. The formulation of monetary policy currently requires an assumption about whether and how far accommodative policy can push down unemployment as well as an assumption about whether we're dealing with transitory or more persistent price pressures.”
