“The basic problem for the Fed is it’s used all the heavy artillery a long time ago and it’s down to relatively weak weapons,” Blinder, a former Fed vice chairman, said in an interview today on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays.
“Even a full-scale QE3 in mortgage-backed securities is not that powerful a weapon these days with mortgage rates as low as they are” and impediments to the market, including borrowers who can’t refinance because their mortgage is larger than their home’s value, he said. The Fed, seeking to cut borrowing costs, has bought $2.3 trillion of securities in two rounds of quantitative easing, or QE.
Central bank officials on June 20 downgraded their forecasts for growth and employment while noting “significant downside risks” to the economy. At that meeting they announced they would swap $267 billion in short-term Treasury securities with longer-term debt in an extension of their so-called Operation Twist program.
“Compared to doing nothing it’s a little, little, little bit of help,” Blinder said.
Richmond Fed President Jeffrey Lacker dissented from the decision to extend Operation Twist, first announced in September and scheduled to end this month. Lengthening the program was unlikely to boost growth, he said.
Blinder said he agreed with Lacker’s assessment that the program will provide little boost to growth yet said the central bank should still do what it can to help.
A more effective program, he said, would be to provide $400 billion to $500 billion of fiscal stimulus including infrastructure and jobs programs. Republicans are unlikely to report such programs, he said.
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