Bullard sees Fed portfolio tweak as ineffective

Reuters News
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Posted: Aug 25, 2011 7:39 PM
Bullard sees Fed portfolio tweak as ineffective

By Ann Saphir and Mark Felsenthal

JACKSON HOLE, Wyoming (Reuters) - A bid by the U.S. Federal Reserve to lower long-term interest rates further by rebalancing its portfolio would probably not have much impact, a top Fed official said on Thursday.

Fed Chairman Ben Bernanke is expected to raise the possibility of adjusting the Fed's balance sheet to weight it more heavily with longer-term securities in a widely anticipated speech Friday in Jackson Hole, Wyoming, where central bankers and leading economists from around the world are gathered for an annual meeting hosted by the Kansas City Fed.

A strategy aimed at lowering interest rates of longer-dated debt, sometimes referred to as a twist operation, would help drive down longer-term borrowing costs for businesses, economists say.

But James Bullard, president of the St. Louis Fed, said he sees little impact from such a move.

"A twist operation would not have very much effect," Bullard told Reuters Insider in an interview. "It's been analyzed many times, and the general tenor of that analysis is that it did not have very much effect."

For the full interview please see http://reut.rs/ojSqTp

Bullard, who is seen as a policy centrist on the spectrum of inflation-focused hawks and growth-centered doves, said the U.S. central bank has better alternatives. Chief among them is bond-buying, which has been shown to be effective at easing monetary conditions.

The Fed cut benchmark short-term interest rates to near zero in December 2008 and has since bought $2.3 trillion in long-term securities to further bolster the economy. Earlier this month the Fed's policy-setting panel signaled it was likely to keep rates on hold for the next two years because of a recovery in which downside risks are on the rise.

Bullard, who is not a voter on the Fed's policy-setting panel this year, said the Fed is ready to act if the economy weakens more or the risk of deflation rises.

Bullard, however, said he would have dissented on the Fed's August 9 decision to freeze short-term rates until mid-2013 because he believes central bank policy should be adjusted as new data comes in.

"Policy should be made according to the state of the economy, not the state of the calendar," Bullard said.

Setting a date certain boxes the Fed in, he said.

(Reporting by Mark Felsenthal, Writing by Ann Saphir; Editing by Leslie Adler)