Fed eyeing more bond buys as 'Operation Twist' nears expiration

By Peter Schroeder - 11/14/12 03:57 PM ET

Several Federal Reserve officials believe the central bank may need to beef up its monthly bond purchases next year, as one of its existing efforts to boost the economy is set to expire.

Currently, the Fed has agreed to buy $40 billion of mortgage bonds every month until the labor market substantially improves. At the same time, the Fed is continuing with "Operation Twist," which has it buying up longer-term bonds while selling off an equal amount of short-term debt in another bid to lower rates.

But the latest minutes released by the Federal Open Market Committee (FOMC) indicate that "many" members believe the Fed will have to increase its monthly purchases once Operation Twist expires at the end of the year. The program was already extended once by the Fed.

The minutes provide a hint of where the Fed might be heading next, and detail an October meeting in which the central bank stood pat on its existing policy, after embarking on its third round of "quantitative easing" in September. As Operation Twist expires, the Fed could expand how much it buys up each month in its efforts to lower unemployment and boost the economy.

The minutes also indicate that the Fed is seriously considering tying its policy moves to specific thresholds of economic data on inflation and unemployment. Currently, the Fed typically communicates how it expects to adjust policy using dates as a guideline. For example, the Fed currently states that it anticipates it will keep interest rates near zero until mid-2015.

But at the October meeting, Fed officials listened to a staff presentation detailing the potential impact of a new approach based on economic data, and the minutes stated that officials "generally favored" using economic variables either to replace or supplement the current date-based guidance.

However, officials differed on whether they should put forward explicit numbers as a basis for policy moves, or take a more implicit approach. Some officials noted that using quantitative data as a baseline for policy shifts could offer a clearer picture to markets about the Fed's intentions.

But others contended that a more holistic, qualitative approach would be preferable, warning that setting explicit number targets could confuse the public instead of inform them. Setting specific numerical goals for Fed policy could suggest that the Fed is merely watching a handful of specific data points in setting policy, when in reality it takes into account a broad range of economic data in setting policy, those officials noted. Others worried that explicit targets could be misconstrued as triggers for Fed action, suggesting that automatic changes to interest rates would come once those thresholds were reached.

Officials agree that there were a number of "practical issues" to be settled before updating Fed practice to include data in its descriptions of policy shifts.