Based on our experience with Operation Twist in the 1960s and with last year’s QE2, the reduction in long-term rates from our actions in September is likely to be less than 20 basis points for the 10-year Treasury yield, which is currently only 2 percent. The pass-through to the rates at which consumers and businesses actually borrow is likely to be considerably less. Thus, I am skeptical that this will do much to spur businesses to hire or consumers to spend.
In my view, 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.
I was concerned that tying monetary policy to the calendar could be misinterpreted by the public; it could suggest that monetary policy is no longer contingent on how the economic outlook evolves. This could lead to a loss of credibility should economic conditions develop in a way that requires the federal funds rate to be adjusted prior to mid-2013.
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