FOMC Statement

I'm a bit behind on this, as I've been traveling. As anticipated, the FOMC voted to do something in its meeting earlier this week. From their point of view, this is the least dramatic policy action they could have taken, which is an extension of the "Operation Twist" program which began in September 2011 and was scheduled to end this month. Just to refresh your memory, Operation Twist involves doing this:

Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less.

As I have argued, most recently here, given the large stock excess reserves outstanding, asset swaps by the Fed - whether they are swaps of reserves for government debt or swaps of short maturity government debt for long-maturity government debt - are essentially irrelevant. What matters under these circumstances is the interest rate on reserves.

A program such as QE2, which involved swaps of reserves for long-maturity Treasuries, increases the size of the Fed's balance sheet, and potentially has some effect on asset prices as it could change beliefs about the future policy rate. However, I don't see that happening as a result of an Operation Twist program. Thus, the Fed's policy action won't accomplish anything, but it's for the most part harmless. The only harm comes if the Fed expects too much from the policy, and projects those expectations to the public. However, the Fed's problem with the public now has more to do with the people who are screaming for more.

One interesting issue: Why did Lacker bother to cast a dissenting vote?