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Fed’s Lockhart Says ‘Operation Twist’ to Have Modest Impact

Federal Reserve Bank of Atlanta President Dennis Lockhart said the Fed program announced last week to buy more long-term securities will probably give no more than a slight boost to the U.S. economy.

“The transmission mechanism for monetary policy remains somewhat impaired, and for this reason I am not expecting large gains from the Fed’s most recent action,” Lockhart said today in a speech in Jacksonville, Florida. “It’s realistic to expect modest positive impact from this program.”

The Federal Open Market Committee voted Sept. 21 to extend the average maturities of the Treasuries in the central bank’s portfolio by purchasing $400 billion of long-term debt while selling an equal amount of shorter-term securities. The so-called Operation Twist is an attempt to push down mortgage and other loan rates to spur growth.

Stocks fell for two days last week as investors weren’t persuaded the “maturity extension program,” similar to an action in 1961, would lift growth. Chairman Ben S. Bernanke and his policy-making colleagues also cited “significant downside risks” to the outlook.

Dallas Fed President Richard Fisher said today the program to push down longer-term interest rates risks proving ineffective and may hurt job creation. It was “a strategic decision where I did not feel the benefits outweighed what I perceived to be the costs,” Fisher said in a speech in Dallas.

Stocks Rise

U.S. stocks rose, with the Standard & Poor’s 500 Index increasing 1 percent to 1,175.38 at 4:10 p.m. in New York trading. Yields on 10-year Treasury notes rose eight basis points, or 0.08 percentage point, to 1.9 percent.

The maturity extension program is “a measured, incremental attempt to add more support to the recovery,” Lockhart said in a speech to the World Affairs Council of Jacksonville. “It’s not a fix for everything that ails the economy, but it should help.”

During a question period with reporters, Lockhart said he would have voted last week for the program. The plan is more appealing than purchasing additional bonds because it doesn’t increase the challenge of eventually scaling back the Fed’s portfolio, he said.

Still, Lockhart said he wouldn’t rule out more policy accommodation, including buying more bonds or the use of “communications tools.” He didn’t describe such tools.

‘High Bar’

“I continue to view quantitative easing or a large-scale asset purchase program as requiring a pretty high bar to justify because it carries with it the risk of growing the balance sheet substantially,” he said to reporters. “Depending on circumstances, that too cannot be ruled out.”

Outright asset purchases are more difficult to unwind and “can influence inflation expectations, which are central to managing good monetary policy,” Lockhart said.

Lockhart agreed with two Fed officials who yesterday said they continue to be on guard against inflation. The recent pace of the consumer price index would be “unacceptable” if it continues at that pace, though price gains will likely moderate, Lockhart said.

“Prices of most commodities, including oil, have eased from their recent highs,” he said. “Further, the painfully high unemployment rate is consistent with considerable slack or excess capacity in the economy, which tends to constrain wage growth.” Finally, “longer-term inflation expectations remain well anchored.”

‘Quite Leery’

Fed Governor Sarah Bloom Raskin said the central bank’s use of tools has been “completely appropriate” and that she would be “quite leery” of allowing higher inflation or price expectations in an attempt to lower real interest rates. St. Louis Fed President James Bullard said faster inflation won’t reduce the housing glut. He also said “monetary policy is ultra-loose right now, and appropriately so.”

The Atlanta Fed official said while he has lowered his forecast for growth this year, he still expects an expansion in gross domestic product of 1 percent to 2 percent in 2011 and 2 percent to 3 percent next year.

“I expect the pace of the recovery to build, albeit modestly, and this will bring a gradual reduction in unemployment,” Lockhart said. “Disinflationary pressures will cause inflation to moderate to more acceptable levels.”

Economists have cut their forecasts for growth, according to a Bloomberg News survey taken from Sept. 2 to Sept. 7. The median forecast calls for a 1.8 percent annual pace of expansion in the third quarter, down from 2.1 percent in the previous month’s survey. Growth next year is forecast to average 2.2 percent, down from 2.4 percent.

Stagnant Payrolls

Stagnant payrolls in August have added to data over the past month showing the economy is faltering, including slowing manufacturing, plunging consumer confidence, falling home values and lower bond yields and stock prices.

The Fed maintained its pledge made in August to hold its benchmark interest rate near zero through the middle of 2013 so long as unemployment stays high and the inflation outlook is “subdued.” The target rate has been in a range of zero to 0.25 percent since December 2008.

(Updates with Fisher comments on easing in fifth pargraph.)
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