WASHINGTON (MNI) – The following are excerpts from an interview
with Dallas Federal Reserve Bank Pres. Richard Fisher Tuesday with Fox
Business Network:

FISHER: “Under the MEP, under the maturity extension program, what
you call Operation Twist, we end up in our portfolio, which is a massive
portfolio as you know, with no holdings of anything that is between
overnight and — well, between three months and three years.

“So all Treasury bills will be out of the system, open market
account portfolio at the Federal Reserve. And one question is how does
this interfere with what goes on on Wall Street in terms of lending and
reverse of purchases of those kinds of securities? What impact will we
have on the so-called short end of the yield curve, that space between
three months and three years?

“Because we’re spending — we’re selling those to buy the
longer-term securities. One of the interesting impacts is that those
three to — three-month to three-years, they roll off automatically;
whereas the longer ones we’re going to have to have committee
discussions and figure out when the right time to sell is and what the
right amounts to sell.

“And this was something that I have expressed concern about.
There’s not an automaticity to it. It doesn’t constantly refresh itself.
We have to make conscious decisions and be very involved in the
marketplace. It’ll be raising the order of difficulty of what we have to
do. And the question is, to what benefit?”

—

FISHER: — “Because everybody else is doing so poorly, money is
rushing into the United States.

“As difficult as you and I find it hard to believe with our
government in such a mess — and I’m talking about the Congress not
being able to decide, approaching a fiscal cliff, all this uncertainty,
U.S. Treasuries are still in demand. And as you know, I’ve said we are
the best-looking horse in the glue factory. And what that means is
those inflows are supporting the interest rates here in the United
States.

“It’s hard for me to tell, personally, how much Operation Twist is
having an effect and how much is the flows. My suspicion is Operation
Twist is having a very minor effect and I don’t think — and I have
argued that the benefits do not exceed the costs; the costs exceed the
benefits. And that’s why I personally didn’t support the program.”

—

QUESTION: Do you think that the economic situation will deteriorate
to the point where members of the Fed might suggest that the Fed needs
to buy more bonds?

FISHER: “Well, there are some members — and I can only speak for
myself … . Those are the rules we operate under, that would advocate
doing more. I advocate — well, I haven’t been in favor of what we’ve
recently done, as you know. And what we’ve been doing for some time. So
there’s a healthy debate. That’s the nature of a 19-person committee.

“The question really is what’s the efficacy? How effective is it
for us to enter the marketplace, buy more securities? I argue we have
so much money lying fallow that’s just not being used, $1.5 trillion in
excess bank reserves that are on deposit at the Federal Reserve Banks
around the country.

“There are 12 of us that keep those deposits for private banks;
over $2 trillion in corporate money that’s just sitting on their balance
sheets, not being used. Even more money in non-depository financial
institutions.

“So there’s a ton of money sitting out there. And the real
question is why isn’t it being put to work? And then another question
would be if we added to that, why would be, since what’s already there
is not being put to work?”

—

FISHER: “Well, as you know, the recent step taken by the Open
Market Committee was to extended what’s called Operation Twist, that is
to move out further in the yield curve. We’re going to reach a point by
the end of this program where over a third of the longer dated
securities, treasuries of the United States from six years onward will
be owned by the Federal Reserve.

“So it’s not so much that we have to claw back here. The question
is what are the limits as to how far we can go without distorting the
marketplace. Theoretically, of course, any central bank can print
unlimited amounts of money.

“But the real question is: where does it start to interfere with
the way that markets allocate securities? And what are the limits that
one single buyer can entertain? And then what happens when you do
finally exit as the economy hopefully gets better and stronger?

“And we’ll be on the sell side; the market will be on the buy side.
We’ll be selling those instruments into the marketplace. And what kind
of price function occurs then, and what are the dynamics?”

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$]