Bloomberg News

Fed’s Plosser Sees No ‘Major Impact’ From Operation Twist

October 12, 2011

(Updates with Plosser quote on Operation Twist in sixth paragraph.)

Oct. 12 (Bloomberg) -- Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank’s so-called Operation Twist won’t have a “major impact” on the speed of the economic recovery and that he expects U.S. growth to “gradually accelerate” to about 3 percent next year.

“The U.S. economic recovery will continue and gradually strengthen over time,” Plosser said in a speech in Philadelphia today. “Although the downside risks around this forecast are apparent, I do not believe we are on the verge of a double-dip recession.”

He forecast growth of less than 2 percent this year, and said Europe’s sovereign debt crisis may pose the “greatest uncertainty” to the outlook.

Plosser dissented against the Federal Open Market Committee’s last two decisions to expand its record monetary stimulus, joining Richard Fisher of Dallas and Narayana Kocherlakota of Minneapolis. The regional Fed presidents pose the most opposition within the FOMC since 1992, voting against last month’s plan to swap $400 billion of shorter-term securities in the Fed’s portfolio for longer-dated ones in an effort to bring down interest rates and spur growth.

Operation Twist

Operation Twist risks damaging the Fed’s credibility and is likely to reduce yields on the 10-year Treasury note by “less than 20 basis points,” Plosser said. A basis point is 0.01 percentage point. His remarks at the Zell/Lurie Real Estate Center fall members’ meeting today were similar to those given in Radnor, Pennsylvania, on Sept. 29.

“Operation twist in my view is a fiscal operation. It is not monetary policy,” Plosser said in a question-and-answer session after his speech. “What we’re doing with Operation Twist could be done by the U.S. Treasury,” and the Treasury could “undo it on their own” by issuing longer-term securities.

Plosser, Fisher and Kocherlakota also dissented when U.S. central bankers in August said they planned to hold interest rates near zero until at least mid-2013. That replaced their prior pledge to keep rates low for an “extended period.”

“The actions taken in August and September risk undermining the Fed’s credibility by giving the impression that we think such policies can have a major impact on the speed of the recovery,” Plosser said. “It is my assessment that they will not.”

He said the August and September actions “will do little to improve the near-term prospects for economic growth or employment, but they do pose some real risks.”

Plosser forecast that the unemployment rate will fall to 8 percent to 8.5 percent at the end of 2012 from 9.1 percent in September, and that inflation will “moderate” as commodity prices decline. He also renewed his calls for the Fed to adopt an explicit target for inflation.

--Editors: Kevin Costelloe, Gail DeGeorge

To contact the reporter on this story: Caroline Salas Gage in New York at

To contact the editor responsible for this story: Chris Wellisz at

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