By Steven K. Beckner
ST. LOUIS, Mo. (MNI) – St. Louis Federal Reserve Bank President
James Bullard Thursday night said he doubted Fed policymakers will
prolong the Maturity Extension Program or “Operation Twist” when it
expires at the end of December, but said they could “replace” it to some
extent.
Bullard, who will be a voting member of the Fed’s policymaking
Federal Open Market Committee next year, said the FOMC could sell
securities dated longer than three years to finance purchases of
long-term securities, but said that would be “problematic.”
If the FOMC instead decides to replace “Operation Twist” with
enlarged bond purchases in its third quantitative easing program, he
indicated he would be against replacing it on a “one-for-one” or
dollar-for-dollar basis.
Bullard said the Fed’s monetary policy stance is already “pretty
easy” — too easy, he suggested, for an economy that is improving amid
diminished headwinds from Europe and likely headed toward 3.5% growth
next year.
Under Operation Twist the Fed is buying $45 billion per month of
long-term Treasuries, financed by sales of three-year-and-less
Treasuries. But that is due to expire on Dec. 31. Meanwhile, the Fed is
buying $40 billion per month of mortgage backed securities, financed by
the creation of new reserves, until the labor market improves
“substantially.”
Bullard, talking to reporters following an address at Washington
University, said “it’s unlikely we’d extend Operation Twist, because
there’s only so much balance sheet we can really use to sell short and
buy long.”
Rather, the FOMC is “going to have to make a decision to replace
that with something else and what to replace it with,” he said, adding
that “one of the advantages of the approach we took with QE3 is that we
can adjust (the amount of asset purchases) to make up for any perceived
tightening.”
Expanding QE3 is “definitely an option on the table,” he said, but
“I wouldn’t want to prejudge.”
Asked by MNI whether he would support replacing the expiring $45
billion in Twist purchases on a one-for-one basis, Bullard indicated he
would not.
“To me personally that sounds like easier policy,” he replied. “If
you just wanted to replace Twist … you wouldn’t have to go to a
one-for-one replacement.”
But he said, “We’ll have to see where the decision comes down.”
Bullard, in his earlier speech, had cited research showing that
monetary policy is already “substantially easier” than Taylor-type
monetary policy rules recommend.
MNI also asked Bullard about the possibility of the Fed selling 3-
to 6-year securities to finance long-term Treasuries.
He said that “is an option,” but called it “problematic about the
kind of effects that’s supposed to have.”
Bullard suggested that additional monetary stimulus is not likely
to be needed. He said the economy is improving, particularly in the
housing sector, as “headwinds are dissipating.” He projected 3.5% growth
next year, with the unemployment rate falling to 7.2% by year-end.
He had a caveat, though. If the “fiscal cliff” is not resolved, he
warned, it could do great damage to the economy which the Fed could not
offset.
Earlier, in response to audience questions, Bullard had warned that
the Fed’s extended zero interest rate policy is causing the kind of risk
taking that could lead to a new asset bubble.
But he told reporters that, although land prices have been soaring,
so far he has not seen evidence of a new bubble. It is important,
however, that the Fed “keep an eye on that,” he said.
“If you’re ever going to have a bubble it’s going to be in a low
interest rate environment,” he said.
In other comments, Bullard said, “I don’t really see increased
tolerance for inflation” on the FOMC. He said it’s just that “the
committee is concerned about labor markets. They’re not improving as
fast as we would like, but they are improving.”
** MNI **
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