Fed’s Williams Says It’s Unclear If ‘Operation Twist’ or QE Works Better
San Francisco Fed Reserve Bank President John C. Williams
George Frey/Bloomberg
John C. Williams, president of the Federal Reserve Bank of San Francisco.
John C. Williams, president of the Federal Reserve Bank of San Francisco. Photographer: George Frey/Bloomberg
Federal Reserve Bank of San Francisco President John C. Williams said it’s unclear whether outright purchases of Treasury securities or lengthening their duration such as in the plan announced this week is more effective in boosting the economy.
“To what extent is it the size or the composition of the central bank’s balance sheet that matters?” Williams said in a speech in Zurich, Switzerland. There is “uncertainty” on how the moves work. “This question is no mere theoretical curiosity, but has very real practical relevance.”
Williams is the first Federal Reserve policy maker to comment on the central bank’s decision Sept. 21 to extend the average maturities of the Treasuries in its portfolio by purchasing $400 billion of long-term debt while selling an equal amount of shorter-term securities. The operation is an attempt to push down mortgage and other loan rates to spur growth.
Stocks fell for two days as investors weren’t persuaded the so-called Operation Twist, similar to an action by that name in 1961, would help to lift growth. Chairman Ben S. Bernanke and his policy-making colleagues also cited “significant downside risks” to the outlook. Bond yields fell after the decision.
Williams, 49, didn’t discuss the outlook for monetary policy or the economy in the text of his speech to the Swiss National Bank Research Conference.
Williams said the Fed’s $600 billion in asset purchases, completed in June, likely reduced the yield on 10-year Treasury notes by 15-20 basis points. That was about the same impact as cutting the federal funds target rate by three-quarters of a percentage point, he said.
‘Powerful Effects’
The Fed official said announcing future plans for monetary policy, such as the Fed’s pledge last month to keep rates near zero through mid-2013, can have “powerful effects,” citing declines in Treasury yields.
The Fed this week maintained its pledge to hold its benchmark interest rate near zero for two years so long as unemployment stays high and the inflation outlook is “subdued.” The rate has been in a range of zero to 0.25 percent since December 2008.
The experience of the last few years shows asset purchases and forward guidance are “useful policy tools” when the Fed’s benchmark rate is near zero, Williams said, raising the question of whether they should be used as standard policies rather than being reserved for “extraordinary times.”
Appetite for Risk
“These policies are still relatively unfamiliar to the public,” he said. “Consequently, their effects on the public’s inflation expectations, appetite for risk, and so forth are difficult to predict. This adds an element of uncertainty and raises concern about unintended consequences.”
Large-scale asset purchases “may create distortions to asset prices or financial market functioning,” he said. “Of course, these costs must be weighed against the value of asset purchases for macroeconomic stabilization.”
Williams, who has worked in the Fed system since 1994, was a senior economist for the Council of Economic Advisers during the Clinton administration. The Sacramento native succeeded Janet Yellen, now the Fed board’s vice chairman, and will become a voting member of the rate-setting FOMC next year.
To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net
To contact the editor responsible for Klaus Wille in Zurich at kwille@bloomberg.net
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