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The Globe and Mail

U.S. Federal Reserve no slouch with stimulus effort

U.S. Fed chairman Ben Bernanke


So how does Ben Bernanke do the twist? Here's how: fairly aggressively.

The biggest question ahead of the conclusion Wednesday of the Federal Open Market Committee was not whether U.S. policy makers would attempt to lower borrowing costs by realigning the average maturity of the assets on the Federal Reserve's balance sheet – the "Operation Twist" strategy from 1961.

Wall Street analysts had been predicting a "twist" for several weeks, and the Fed had done nothing to dissuade investors from that notion. So the bigger question was how aggressive Mr. Bernanke, the FOMC chairman, and his colleagues would be in implementing the policy, which seeks to flatten the yield curve by increasing demand for longer dated debt securities.

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The Fed went big enough to avoid disappointing markets, while stopping short of blowing the roof off the place.

By the end of June, 2012, the Fed will purchase $400-billion (U.S.) of Treasury securities that have remaining maturities of six years to 30 years. The Fed will raise the money for this purchase program by selling its holdings of assets with maturities of less than three years.

"This program should put downward pressure on longer-term interest rates and help make the broader financial conditions more accommodative," the FOMC said in a statement.

Economists at Barclays Capital said earlier Wednesday that the Fed would have to announce a program of more than $300-billion or risk a backlash from investors who had already priced in further stimulus measures from the central bank. Barclays said the Fed possessed the resources to plow as much as $800-billion into debt with maturities between five years and 15 years.

But Mr. Bernanke's twist came with an extra flourish. The policy committee also said that as the Fed's holdings of debt issued by U.S. housing agencies and mortgage-backed securities matures, the proceeds will be reinvested in agency mortgage-backed securities. This is a bid to give the housing market a jolt – or at least keep it from sinking any deeper.

Economists are mixed on whether the Fed's latest "Operation Twist" will work, and those who support the move are quick to say that the economic impact will be modest.

Some of the skeptics reside at the FOMC. As in August, when the Fed's policy committee made a conditional – yet extraordinary – pledge to leave borrowing costs exceptionally low until mid-2013, Dallas Fed president Richard Fisher, Minneapolis Fed president Narayana Kocherlakota and Philadelphia Fed president Charles Plosser voted against further stimulus.

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Their dissent will get attention. But the decision of the seven other committee members to go ahead without the support of the full committee shows an equal resolve among a large majority of the FOMC to do what it can to boost the flagging economy.

"The Committee continues to expect some pickup in the pace of recovery over the coming quarters, but anticipates that the unemployment rate will decline only gradually toward levels that the committee judges to be consistent with its dual mandate," the statement said.

The U.S. unemployment rate is 9.1 per cent. The Fed judges its mandate from Congress to achieve "maximum employment" equates to an unemployment rate of about 5.5 per cent.

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