Dallas Federal Reserve Bank President Richard Fisher on Tuesday slammed the central bank’s decision last week to extend the maturity of its balance sheet, calling Operation Twist “jujitsu on the yield curve” that is “likely to prove ineffective” and could actually work against job creation. Until Congress can get its act together and put in place policies that encourage businesses to take advantage of low interest rates, “further monetary accommodation - be it in the form of quantitative easing or performing “jujitsu” on the yield curve through efforts such as Operation Twist — will represent nothing more than pushing on a string,” Fisher said in a speech in Dallas. Fisher added that his regular business contacts gave him an “earful” of arguments against a Twist-like plan before the Fed meeting. The business executives argued it would scare consumers, hurt banks and pension funds and make the Fed’s eventual exit from ultra-easy monetary policy more difficult, he reported. Fisher was one of three Fed regional-bank presidents who voted against Operation Twist, under which the Fed will sell $400 billion of its current holdings of short-term Treasurys and buy an equal amount of longer-maturities over the next nine months. The idea of the plan is to drive down long-term interest rates and hopefully boost business spending and job creation. Fisher said the program might indirectly come to the aid of money-market funds by mildly raising short-term rates. This might allow the money-market funds to stop buying European bank debt in search of higher yields to cover costs. European bank debt is “now considered by many analysts to be somewhat toxic,” he dryly noted. Fisher also said he did support the Fed’s decision to reinvest maturing agency debt and agency mortgage-backed securities into agency MBS as “a tactical way to provide limited assistance to the mortgage market at little cost.” Lockhart differs on Twist In a separate address Tuesday, Atlanta Fed President Dennis Lockhart said he supported Operation Twist, but thought it might only have a “modest positive impact” on the economy. No one seems to fully understand what a leveraged rescue fund for the euro zone would mean, but the hint of a new plan in the works is clearly supporting the currency. “It is not a fix for everything that ails the economy, but it should help,” Lockhart remarked in a speech in Jacksonville, Fla. Operation Twist won’t result in “large gains” because the normal channels though which Fed interest-rate cuts affect the economy are blocked, he added. Lockhart also said he has trimmed his growth forecast for the next 15 months but doesn’t expect a double-dip recession. Inflation has been “higher than desired and higher than expected” this year, but should “fall back” in the next few months, according to Lockhart, who will vote on interest-rate decisions in 2012. Potential spillover from the European debt crisis is the biggest threat to the recovery at the moment, he said. Lockhart commented that the market should not take the decision to launch Twist as signaling further action was likely, or conveying that central bankers were done easing. The direction of policy going forward will be data-dependent, he elaborated.
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