The FINANCIAL -- WASHINGTON -- U.S. Federal Reserve Gov. Sarah Bloom Raskin on Monday
defended the Fed's latest unconventional move to stimulate the economy,
saying additional policy measures are necessary to help the economy
overcome a slew of extraordinary challenges.
"In my judgment, the Federal Reserve's deployment of our policy tools has been completely appropriate in promoting maximum employment and price stability," she said, speaking at a forum hosted by the Center for Financial Policy at University of Maryland's Robert H. Smith School of Business.
Last week, the Fed agreed to recast its $2.65 trillion securities portfolio in an effort to reduce long-term interest rates. The Fed plans to shift its holdings so it will have more long-term U.S. Treasury bonds and more mortgage debt than previously planned. It hopes the lower rates will boost investment and spending and provide a shot of adrenaline to the beleaguered housing sector.
Under the new program, dubbed "Operation Twist," the Fed will sell $400 billion in Treasury securities that mature within three years and reinvest the proceeds into securities that mature in six to 30 years, significantly tilting the balance of its holdings toward long-term securities. It will take the proceeds from its maturing mortgage-backed securities and reinvest them in other mortgage-backed securities. For the past year, it has been reinvesting that money into Treasury bonds, shrinking its mortgage portfolio.
Raskin said the shift is already having an impact.
"Our announcement appears to have been successful in narrowing the spread between rates on agency MBS and Treasury securities of comparable maturity," she said. "That spread had widened substantially since earlier this year, and the continuation of such a trend could have pushed up mortgage rates and adversely affected the housing sector."
Still, the Fed's action last week has been controversial. Three of the 10 voting Fed officials opposed the move. Also, Republican members of the U.S. Congress have voiced concern that the Fed's aggressive measures could hurt the economy rather than help it.
Raskin, however, said the Fed's actions last week and throughout the crisis have been appropriate to address the limping economy. She noted that the pace of the economic recovery has been modest and the recession has proven to be deeper than what experts initially thought. Meanwhile, the increases in economic activity have not been enough to lead to any sustained reduction in the unemployment rate, she noted.
She pointed out that the labor market is weak, credit conditions remain tight and many households may be unable to take advantage of lower borrowing rates.
"These circumstances have called for forceful policy measures," she said.
The Fed's policy moves have helped American families and businesses, Raskin added.
"By following our actual policy of keeping the target funds rate at its effective lower bound since late 2008, the Federal Reserve saved millions of jobs that would otherwise have been lost," she said. "Of course, substantial uncertainty surrounds various specific estimates, but there should be no doubt that the FOMC's forceful actions helped mitigate the consequences of the crisis and thereby spared American families and businesses from even greater pain."