Dallas Fed president speaks out: "Operation Twist" won't work

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Federal Reserve Bank of Dallas President Richard Fisher said the central bank's decision last week to push down longer-term interest rates risks proving ineffective and may hurt job creation.

The plan dubbed Operation Twist by economists and announced after the Fed's Sept. 20-21 meeting in Washington was "a strategic decision where I did not feel the benefits outweighed what I perceived to be the costs," Fisher said in a speech today in Dallas.

Fisher's remarks are his first since he joined presidents Charles Plosser of Philadelphia and Narayana Kocherlakota from Minneapolis in dissenting for a second straight month, posing the most opposition within the Federal Open Market Committee in almost 19 years. The Dallas Fed chief repeated concerns today about the Fed's second round of bond purchases, which ended in June, and its pledge to keep the target for the benchmark U.S. interest rate low through at least mid-2013.

"My fundamental concern is about the efficacy of these initiatives," Fisher said at a luncheon for community leaders. He questioned whether the central bank's accommodative policies are encouraging excessive risk-taking, and if they will do "nothing more than pushing on a string" unless accompanied by appropriate fiscal and regulatory policies.

Lockhart Speech

Separately today, Fed Bank of Atlanta President Dennis Lockhart said Operation Twist will probably give no more than a slight boost to the U.S. economy.

"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 said in a speech in Jacksonville, Florida. "It's realistic to expect modest positive impact from this program."

Under Operation Twist, the central bank plans to replace $400 billion of short-term debt in its portfolio with longer- term Treasuries maturing in six to 30 years, as part of an effort to reduce borrowing costs and help the world's largest economy recover. The plan gets its name from a similar action in 1961.

Yields on 30-year Treasuries tumbled after the Fed's Sept. 21-22 meeting in Washington, and have since gained. The yield increased 12 basis points, or 0.12 percentage point, to 3.11 percent at 2:22 p.m. in New York, according to Bloomberg Bond Trader prices.

Consumer Confidence

Data released today show confidence among U.S. consumers stagnating near a two-year low this month, and property values in 20 U.S. cities falling 4.1 percent in July from a year earlier.

The U.S. economy has "some forward momentum," Fisher told reporters after his speech. Even so, "it's weak. Businesses are on pause. Customers and consumers are on pause. Uncertainty about the future is rampant and uncertainty undermines confidence."

"There's lots of liquidity," he said. "You cannot rely on the Federal Reserve to do it all."

Fisher cited recent conversations with business operators, who told him that a plan like Operation Twist would signal the FOMC's concerns about a worsening economy and give people incentives to hoard savings, complicate the Fed's future decisions, and suppress bank earnings.

"There is a significant risk that the policies recently undertaken by the FOMC are likely to prove ineffective and might well work against job creation," he said.

Fisher said he doesn't take issue with the Fed's decision, also announced last week, to reinvest proceeds from maturing housing debt into mortgage-backed securities instead of Treasuries.

"This decision, while not expected by the markets, was acceptable for me as a tactical way to provide limited assistance to the mortgage market at little cost," he said.

The 62-year-old policy maker has been president of the Dallas Fed since 2005. As a voting member of the FOMC in 2008, he dissented five times in favor of tighter policy.

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what's field?
won't help, small businesses, hiring, labor market...
But will help WS MMs. QE1, QE2, OT,...