Fed could build firepower for new Operation Twist: Harker

FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington
FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo

March 26, 2019

FRANKFURT (Reuters) – The U.S. Federal Reserve intends to shorten the duration of bonds it has on its balance sheet to build some firepower in case it needs to use it as a stimulus tool once again, Federal Reserve Bank of Philadelphia President Patrick Harker said on Tuesday.

He made a reference to the Fed’s 2011 Operation Twist, in which the central bank sold shorter-dated Treasuries to buy longer-term paper in a bid to bring down interest rates and stimulate the economy, as a possible future option.

“I think there’s a general consensus… that we do want to go shorter, to buy ourselves the option over time, if we ever had to implement a twist like program again, we’d have that option,” Harker told a business meeting in Frankfurt.

Harker, who participates in Fed policy discussions but does not have a vote until next year, added that any shift in the duration of the Fed’s balance sheet would take “quite a while” and there has been no decision yet on how to proceed.

But Harker downplayed concerns about the health of the U.S. economy, arguing that the outlook remains good and this month’s shift in the Fed’s interest rate expectation was not as significant as sometimes portrayed.

The Fed last week abandoned projections for any interest rate hike this year and expectations for future rate hikes shifted down by one of the biggest margins since the bank started publishing its so-called ‘dot plot’ of forecasts for the federal funds rate.

“My dot… didn’t come down that much because I wasn’t up where everybody else was,” Harker told an OMFIF meeting. “The median did shift down but it shifted down by one notch; sometimes we overstate how much of a shift that was.”

Harker added that he saw inflation rising up to 2.2 percent this year before easing back to 2 percent.

(Reporting by Balazs Koranyi, Editing by William Maclean)

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