Feeling confused and frustrated when trying to follow the status of economic activity, or lack thereof? Don’t feel bad, members of the U.S. Federal Reserve can’t seem to wrap their minds around it either.
Legally, the Fed has two equal mandates: (a) to maximize employment and (2) to maintain stable prices (i.e. inflation). The question of how to balance the competing goals is close to unanswerable these days; requiring skill, charisma and good timing.
The 10-person Fed Reserve Open Market Committee (FOMC) is currently in the thick of such an ideological split- with the majority promoting growth while three members fear such proposals will only invite a serious bout of inflation.
Tuesday, Dallas’s Federal Reserve Bank President Richard Fisher expressed his displeasure with the Central Bank’s newly minted “Operation Twist.”
The initiative, announced earlier this month, will move $400 billion from short to long term securities on the Central Bank’s balance sheet, with the intention of keeping mortgage rates down and boosting economic activity across the country.
Fisher asserted that the solution to solve the nation’s economic unrest is to utilize fiscal policy rather than modify monetary policy. In English, this means that in Fisher’s opinion, the FOMC has done all it can and that it is time for lawmakers in Washington to do something about stimulating economic growth.
Fisher, a self-proclaimed “inflation hawk,” cited four primary reasons for his objection to the “Operation Twist” plan, stating its ability to essentially flatten the U.S. treasury yield curve:
2. Bank earnings will be damaged, potentially causing capital problems.
3. Pension funds returns will need to be refigured, with the current shaky economic environment in mind, rather than the smoother seas of the past when previous negotiations had been settled.
4. If successful, the program would undermine the perception of the Fed’s independence.
Those in agreement with Fisher fear banks and pension funds will reap the whirlwind of the “jujitsu-like” plan.
Conversely, in a separate address the same day, Atlanta Fed President Dennis Lockhart said he supported the policy but only anticipates a “modest positive impact.”
“Operation Twist won’t result in large gains because the normal channels through which Fed interest rate cuts affect the economy are blocked.”
Recently, Lockhart has modified his future growth forecast, however, he is still confident enough not to believe we’re headed back down for a double dip.
In agreement, Fisher admitted to “some forward momentum,” however, added that the economy is closing in on “stall speed.”
“I wouldn’t say we’re out of bullets, but whatever ammunition is still in our pockets, in our holster, we have to deploy very, very carefully.”
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