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Fed's Plosser: Twist plan won't help much

Fed's Plosser: Twist plan won't help much (by Greg Robb)

WASHINGTON (MarketWatch) - The Fed's decision to twist the yield curve by swapping shorter-maturity government securities for longer-dated ones won't do much to help the economy and comes with significant potential costs, said Charles Plosser, the president of the Philadelphia Federal Reserve Bank on Thursday. The reduction in rates from the plan is likely to be less than 20 basis points for the 10-year Treasury yield, Plosser said. And the pass-through to the rates at which consumers and businesses actually borrow is likely to be even less, he said. At the same time, the Twist policy risks higher inflation, which might combine with the high unemployment rate to create stagflation, Plosser said. Plosser voted against Twist, one of three dissenting votes. Plosser said the Twist plan could undermine Fed credibility by giving the impression that the Fed thinks the plan can have a major impact on the speed of the recovery. The best way for the Federal Reserve to preserve its credibility would be to adopt an explicit inflation target, Plosser said.