Fed Likely to Begin ‘Operation Twist’ Easing, Economists Say

U.S. Federal Reserve Chairman Ben S. Bernanke
Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Joshua Roberts/Bloomberg

Federal Reserve officials tomorrow will probably announce a program for monetary easing that will do little to help 14 million unemployed Americans find work, according to economists in a Bloomberg News survey.

The Federal Open Market Committee will decide to replace short-term Treasuries in its $1.65 trillion portfolio with long-term bonds, according to 71 percent of 42 surveyed economists. The move, known as “Operation Twist” for its goal to bend the yield curve, will probably fail to reduce the 9.1 percent unemployment rate, 61 percent of the economists said. Among those, 15 percent predict it will be “somewhat harmful.”

Operation Twist is among a few untested policy tools that Chairman Ben S. Bernanke has said the Fed could use as risks to the U.S. recovery rise and unprecedented easing falls short of fulfilling the Fed’s mandate for full employment. The yield on the 10-year Treasury note already fell to a record low this month on concerns global growth is flagging and Europe’s sovereign-debt crisis will intensify.

“It’s better than nothing but it’s obviously not going to be a knockout blow or a game changer for the economy,” said Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. in New York. The FOMC began its meeting at around 10:30 a.m. in Washington and plans to release a policy statement tomorrow at about 2:15 p.m.

Feroli estimates the Fed will reduce longer-term yields by about 0.1 percentage point by announcing a swap of $300 billion to $400 billion in Treasuries, selling securities with one to three years remaining maturity, and purchasing mostly those with seven to 12-year maturity.

FOMC Dissenters

Bernanke faces resistance to more dramatic easing from three policy makers who dissented against the Aug. 9 FOMC decision to keep the main interest rate near zero until at least mid-2013. It was the first time since 1992 that three FOMC members dissented.

“Operation Twist may not provoke the hawks on the FOMC, and it does not antagonize those members of Congress who are concerned about potential inflationary pressures from further expanding the size of the balance sheet,” said Dana Saporta, U.S. economist at Credit Suisse in New York.

Republican lawmakers, including House Speaker John Boehner of Ohio, criticized a $600 billion Fed program to buy Treasury securities through June, saying the plan would create asset price bubbles.

Bernanke extended this week’s meeting to two days to give the divided FOMC more time to discuss the merits and costs of its policy options. A “few” Fed officials favored additional easing at their Aug. 9 meeting, according to minutes from the gathering.

Asset Purchases Unlikely

The Fed tomorrow probably won’t announce a new round of asset purchases, or quantitative easing, according to the Sept. 14-16 survey of economists. Seventy-nine percent of the economists said the Fed won’t make such a move this year.

An economy that’s in danger of stalling will prompt the Fed to take action even if the results are modest, said Roberto Perli, a former economist in the Fed’s Division of Monetary Affairs.

“When you have an economy growing under 1 percent in the first half you probably take every 10th of a percent of GDP growth that you can” through a policy such as Operation Twist, said Perli, a managing director at International Strategy & Investment Group in Washington

Growth in the first six months of this year was the weakest since the recovery started in 2009. Gross domestic product expanded at a 1 percent annual rate in the second quarter after 0.4 percent in the first three months of this year.

Bond Traders

Speculation the Fed will announce a plan to favor longer-term debt has prompted Wall Street’s biggest bond traders to stockpile Treasuries at the fastest pace since 2007. The 20 primary dealers held $15.1 billion of Treasury securities due in more than one year as of Sept. 7, up from a $75 billion bet against the debt on May 6, central bank data show.

All but one firm expects the announcement of some type of Operation Twist, according to a separate Bloomberg News survey. U.S. debt due in 10 years or more has returned about 17 percent this quarter, the most since the last three months of 2008.

The yield on Treasury 10-year notes fell on Sept. 12 to 1.877 percent, the lowest ever. Its highest point this year was 3.77 percent on Feb. 9. The yield rose 1 basis point, or 0.01 percentage point, to 1.96 percent at 10:43 a.m. in New York, according to Bloomberg Bond Trader prices.

“Doing nothing at this point with the type of expectations they’ve allowed to form would be risky because it would cause a tightening in financial conditions, rates would go back up, and that goes in exactly the opposite direction they want,” Perli said.

Evans Strategy

None of the 42 economists surveyed said the central bank will adopt a strategy proposed by Chicago Fed President Charles Evans to announce an explicit target for the unemployment rate and inflation rate as conditions for keeping the benchmark fed funds rate near zero.

Also viewed as unlikely is an option outlined to Congress by Bernanke in July testimony to cut the interest rate paid on excess reserves kept by banks at the Fed. Eighty percent of economists in the survey believe the central bank won’t cut the rate on excess reserves at this week’s meeting, with 60 percent believing the Fed won’t adopt this strategy at all and 20 percent believing it will take the step at a later meeting.

The Fed has held the benchmark interest rate near zero since December 2008 and expanded the central bank’s assets in July to a record $2.88 trillion. That has done little to boost consumer spending, which accounts for 70 percent of the economy.

“The macroeconomic environment has remained difficult for consumers who continue to face high unemployment rates, high gasoline and high food costs,” Rick Dreiling, chairman and chief executive officer at Dollar General Corp., said on an Aug. 30 teleconference with analysts. The Goodlettsville, Tennessee-based company is the biggest dollar discount chain in the U.S.

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