Federal Reserve Bank of St. Louis President James Bullard said replacing Operation Twist’s swap of Treasuries with outright purchases of the same amount of securities would represent a policy easing that could risk higher inflation.
“It is reasonable to think that an outright purchase program has more impact on inflation and inflation expectations than a Twist program,” Bullard said today in a speech in Little Rock, Arkansas. “If the goal is to keep policy on its present course, the replacement rate should be less than one-for-one.”
The Federal Open Market Committee, which meets next week, will consider whether to expand purchases of assets, or quantitative easing, after its Operation Twist program of swapping $45 billion a month in short-term Treasuries for long-term debt expires this month. A number of Fed officials have said an expansion will be needed to stimulate a slow economy, according to minutes of the Oct. 23-24 meeting.
“Outright purchases are likely more potent than Twist operations,” Bullard said to the Little Rock Regional Chamber of Commerce. “This suggests somewhat less than one-for-one replacement if the committee’s intent is to keep policy unchanged.”
A measure of prices tied to spending advanced 1.7 percent in October from the same month last year, less than the Fed’s long-run goal of 2 percent, a Commerce Department report showed last week. Excluding food and energy costs, the price gauge increased 1.6 percent from a year earlier.
Bullard, who does not vote on Fed monetary policy this year, repeated he was wary of setting specific numerical thresholds for unemployment and inflation that would lead to policy changes.
The St. Louis Fed official said the central bank “cannot meaningfully target unemployment,” citing a January 2012 statement by the FOMC. “The Committee needs to emphasize that unemployment can remain elevated for reasons unrelated to monetary policy,” he said.
Europe, for example, has suffered from persistently high unemployed due to structural issues, Bullard said.
If targets are set, they should be “actual values for both inflation and unemployment” rather than forecasts for inflation, he said.
The Fed is considering tying its monetary policy to specific levels for the unemployment rate and inflation. Central bankers still need to resolve “a number of practical issues” before a decision on quantitative thresholds can be made by the FOMC, minutes of the Oct. 23-24 gathering showed.
Chicago Fed President Charles Evans said last week the central bank should keep interest rates near zero until unemployment falls to 6.5 percent or below as long as inflation is under 2.5 percent, aligning himself more closely with other Fed officials.
The FOMC in October voted to continue buying $40 billion in mortgage bonds each month, aiming to fuel economic growth and reduce 7.9 percent unemployment.
After concluding a two-day meeting on Oct. 24, the FOMC said it expects to keep the federal funds rate exceptionally low through at least mid-2015, repeating a pledge from Sept. 13.
Bullard, who was the first policy maker to voice support for asset purchases in 2010, has been viewed as a bellwether for investors. His speeches and interviews moved the two-year Treasury yield more than any other FOMC member last year, according to a Macroeconomic Advisers report released Jan. 27.
Bullard joined the St. Louis Fed’s research department in 1990 and became president of the regional bank in 2008. His district includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.