One FED president thinks that doing this will help... More "Twist" is needed, Fed's Rosengren says 7:08 a.m. CDT, June 1, 2012
(Reuters) - The economy needs a bigger dose of the medicine the Federal Reserve is now administering, says Boston Fed President Eric Rosengren, and even more aggressive policy moves would be warranted if the jobless rate starts to rise.
Rosengren, a dovish central-bank policymaker who this week upped the ante for more Fed stimulus, said the best course of action would be prolonging a program known as Operation Twist, in which the Fed extends the maturities of its bonds in an effort to lower rates and spur borrowing and growth.
Operation Twist began in September and is set to expire late next month. At about the same time, June 19-20, Fed policymakers will meet to decide what more - if anything - must be done to deal with a U.S. economic recovery that is sputtering and faces growing threats at home and abroad.
In an interview, Rosengren pointed to weaker economic data in the last few months that, in effect, brought on an inflection point in which the Fed must now act.
Inaction, he said, risks forfeiting the modest improvements in the labor market since last summer.
"Extending Operation Twist would be supportive of more rapid growth. It would not be as dramatic as potentially substantially expanding the balance sheet of the Federal Reserve," said Rosengren, who does not have a vote on Fed policy this year but regains the vote next year.
"If we wanted to provide support for spending, and trying to get the unemployment rate down more quickly than would be embedded in our current forecast, then doing something that is supportive but not very substantial would seem to be appropriate."
Extending the balance sheet, or a third round of quantitative easing (QE3), would involve the Fed buying more long-term securities instead of simply swapping existing shorter-duration securities for longer- ones, as it does in Twist.
The central bank's two quantitative easing programs totaled $2.3 trillion in purchases.
Those, along with near-zero interest rates since late 2008, were the Fed's attempt to battle the brutal recession.
But they have proven controversial, especially given the sputtering overall recovery in which growth has been erratic and the unemployment rate stood at 8.1 percent in April, with many Americans leaving the workforce.
When the Fed launched Twist last year, it committed to buying $400 billion in Treasury securities with maturities of 6 years to 30 years and to selling an equal amount of Treasury securities with remaining maturities of 3 years or less.
While analysts believe the central bank may be running short of securities to sell, it could sell longer-dated bonds.
Some of the more hawkish Fed officials worry that more than enough has already been done, and they warn about inflation getting out of control in the years to come.
Even those dovish policymakers like New York Fed President William Dudley, who is closely aligned with Fed Chairman Ben Bernanke, say that, for now, more action is not needed as long as growth continues to build.
But in a speech on Wednesday, Rosengren gave a full-throated endorsement of the need for more policy action, in part to stave off higher unemployment on a more permanent basis. The May jobs report is due later Friday morning.
In the interview, Rosengren said even more aggressive action by the Fed would be warranted if the unemployment rate starts "going in the wrong direction."
This could stem from Europe's worsening debt crisis, as well as the series of U.S. tax increases and spending cuts scheduled for the start of 2013, known as the "fiscal cliff." If people become convinced that Washington will not steer clear of the cliff, Rosengren said, the jobless rate could rise.
"If we start seeing the unemployment rate rising more rapidly and concerns that inflation would fall further below 2 percent, then we should take more aggressive action in those circumstances," said Rosengren, who expects 1.7 percent inflation this year, below the Fed's 2-percent target.
Another option available to the Fed is communicating more clearly what economic conditions would cause it to change policy, Rosengren added.
If QE3 is launched, Rosengren said he would prefer that mortgage-backed securities, as opposed to Treasuries, are bought in order to give the "housing sector a little more traction."
"My role is just to argue for what I think is appropriate," he said of the Fed's June policy-setting meeting. "We'll just see at that time what arguments carry the day."