By Sheila Mullan

NEW YORK (MNI) – Operation Twist is a “useful step” in offsetting
the effects of the global financial crisis but cannot solve all
problems, Federal Reserve Governor Daniel Tarullo said Thursday.

During a question and answer session following a speech at the
Columbia University World Leaders Forum, Tarullo said that through
Operation Twist, the Fed “wanted to have an effect on long-term rates.”

However, “Operation Twist is a tool whose utility is by definition
limited,” Tarullo said. “Has it solved everything? Absolutely not,” he
continued.

Still, the “calculable marginal effect” of the Operation Twist is a
step worth taking, he said.

Communication tools such as keeping rates unchanged through mid
2013 are also “useful.”

Tarullo also said earlier in his speech that large-scale purchases
of mortgage-backed securities should be at “the top of the list” of
options if Federal Reserve policymakers decide that additional monetary
stimulus is required.

During the question and answer session, he said such monetary
policy moves “can help with aggregate demand and move us closer to full
employment.”

However, he noted that the central bank does not have unlimited
“free reign” on asset purchases as there are certain “statutory limits.”

Turning to the labor markets, Tarullo noted that diminishing
willingness of job candidates to move for other jobs was important to
watch.

“Geographical mobility will be an interesting” question “to dig
into” in the future, he said, in particular to see whether mobility
changes “as job creation does pick up.”

“It would not be a wild expectation to think that people with home
mortgages might well be impeded from moving” if they are under water, he
said.

In his speech earlier, Tarullo largely rejected contentions that
much of the high unemployment is due to “structural” factors.

He maintained that, at most one percentage point of unemployment
can be explained by “structural” factors. There is “a fairly strong
presumption that insufficient aggregate demand is the most significant
factor.”

And the best channel through which to address this “shortfall of
aggregate demand” is by bringing down mortgage rates to try to revive
the housing market.

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