The Federal Open Market Committee's extension of Operation Twist will have a "relatively modest impact on the economy," and if further Fed moves are needed, it should buy "longer-maturity securities, including agency mortgage-backed securities," San Francisco Federal Reserve Bank President John Williams said Monday.
Although the economy is improving, the unemployment rate remains "much too high" and growth "far short" of numbers needed to cut the jobless rate, Williams told a joint convention of the Idaho, Nevada, and Oregon Bankers Associations, according to prepared text released by the Fed. "What's more, the economy has lost some momentum in recent months as gains in consumer and business spending have slowed. In addition, financial markets are once more under strain in response to the flare-up of the European crisis."
On the plus side, he said, housing shows signs of recovery, although the market "is still deeply depressed and recovery hopes have been dashed before."
The budget squeeze, at all governmental levels, and the European sovereign debt crisis have curtailed growth, he said, and the Fed is falling short on both its mandates - full employment and price stability.
"In these circumstances, it is essential that we provide sufficient monetary accommodation to keep our economy moving towards our employment and price stability mandates," Williams said. He said the extension of Operation Twist "will probably have a relatively modest impact on the economy. Therefore, the FOMC noted that it 'is prepared to take further action as appropriate'" at its latest meeting.
"If further action is called for, the most effective tool would be additional purchases of longer-maturity securities, including agency mortgage-backed securities. These purchases have proven effective in lowering borrowing costs and improving financial conditions," Williams said.