1. FED

1) Fed to Purchase Treasuries 13 Times a Month, Sell Six Times

The Federal Reserve said it will buy Treasury securities 13 times a month and sell its holdings of U.S. government debt six times under its plan to lower borrowing costs known as Operation Twist.

The action “should exert downward pressure on longer-term interest rates and help make broader financial conditions more accommodative, thereby supporting a stronger economic recovery,” Fed Governor Sarah Bloom Raskin said today in a speech in Washington, reiterating a point from the FOMC’s statement. The panel cited “significant downside risks to the economic outlook, including strains in global financial markets.”

2) Two Fed Officials Voice Skepticism on Allowing Higher Inflation

Two Federal Reserve policy makers backed the central bank’s record stimulus while signaling they would be skeptical of any plan to tolerate higher inflation as a tool to boost economic growth.

The comments suggest that policy makers, including Fed Chairman Ben S. Bernanke, would have difficulty agreeing on adopting a specific inflation level as a condition for keeping interest rates near zero. Only Chicago Fed President Charles Evans has publicly supported the idea of allowing price increases faster than 2 percent annually as a way to lower unemployment.

3) Fed’s Bullard Says Long-Term Growth May Be Lower After Bust

St. Louis Federal Reserve President James Bullard said the long-term rate of U.S. economic expansion may be lower than anticipated in part because the house price bubble last decade created unrealistic expectations for growth.

The Fed’s “asset purchase program clearly drove both inflation and inflation expectations higher and closer to the Committee’s implicit target over the last year,” Bullard said to an event hosted by Medley Global Advisors and the Financial Times. Given that actual real economic performance was weaker, “this should have meant less inflation, not more,” he said.

2. Euro zone Crises

1) ECB Said to Consider New Covered-Bond Purchases to Ease Tensions

European Central Bank policy makers are likely to next week debate restarting their covered-bond purchases along with further measures to ease monetary conditions, the reintroduction of 12-month loans to banks will also be discussed at the ECB’s Oct. 6 policy meeting, interest-rate cuts are likely to be discussed, though they are not on the current agenda, a euro-region central bank official said.

With money markets tightening, the official indicated the ECB is more likely to try non-standard measures first before resorting to rate cuts. It wouldn’t make sense to re-widen the rate corridor by cutting the deposit rate without also reducing the benchmark rate, the official said. The ECB raised its key rate twice this year to 1.5 percent.

2) Merkel Shifts Her Stance as Crisis Destroys Taboos: Euro Credit

German Chancellor Angela Merkel has stepped up her defense of the euro and toned down calls to punish Greece for its fiscal sins as the region’s debt crisis spread to Europe’s biggest economies.

Merkel hosts Greek Prime Minister George Papandreou for talks in Berlin today as credit-default swaps show a more than 90 percent chance that Greece won’t meet its debt commitments. By contrast, German swaps signal a less than 10 percent chance that the nation will fail to adhere to its obligations.

3) ECB to Shun Managing Bailout Fund, Halpenny Says: Tom Keene

European Central Bank members will push for politicians to take control and expand the region’s rescue fund to contain its sovereign debt crisis, said Derek Halpenny of Bank of Tokyo-Mitsubishi UFJ Ltd.

Policy makers are discussing beefing up the 440 billion- euro ($591 billion) European Financial Stability Facility, seeking a way to prevent the 18-month crisis from spreading as Greece teeters on the brink of default.

“There would be substantial opposition amongst a fairly large number of the council for the ECB to get involved in that way with the EFSF,” London-based Halpenny said. “They’ll be pushing for politicians to take full control of the EFSF and coordinate a larger fund solely through government.”

4) Papandreou Tests Party Backing as Lawmakers Vote on Property Tax

Greek Prime Minister George Papandreou tests the strength of his parliamentary majority today as lawmakers vote on a property tax that is key to persuading the European Union and International Monetary Fund to release an aid installment and avert default.

Greece faces a “moment of truth” and has to fully implement its savings plans in order to qualify for the next installment of international aid, European Commission spokesman Amadeu Altafaj told reporters in Brussels yesterday, and he said that euro-area ministers are unlikely to approve the payment at their Oct. 3 meeting as originally planned. Greece has said it needs the money next month.

Analyst Comment: The parliamentary votes on the required measures will be close. Some Pasok deputies could resign ahead of the crucial voting sessions but the government is expected to secure the parliamentary approval for the necessary laws and the release of the 8 billion-euro ($11 billion) loan.

5) Slovenian Lawmakers Seen Approving EFSF as Debt Crisis Worsens

Slovenia will probably approve a 3.66 billion-euro ($5 billion) contribution to the European Union’s rescue fund, bringing it closer to full passage as the sovereign debt crisis in Europe worsens, economists said.

Lawmakers will vote on the European Financial Stability Facility today, seven days after a government collapse raised concern about a delay.

Analyst Comment: The EFSF bill will be passed, but with probably quite a slim margin. Slovenian politicians are aware of the importance of the vote for Europe and they don’t need further pressure by anybody to make up their mind.

6) Geithner Predicts Europeans Will Step Up Crisis Response

U.S. Treasury Secretary Timothy F. Geithner predicted that European governments will step up their response to their region’s debt crisis after a chiding from counterparts around the world.

European Central Bank officials have indicated they will consider expanding liquidity provisions when they meet Oct. 6.

3. Central Banks

1) Weidmann Sees ‘Danger’ of Market Turmoil Damping German Growth

Bundesbank President Jens Weidmann said risks have increased that the market turmoil caused by Europe’s debt crisis will damp German economic growth.

“Most recently, the German economic outlook has been damped by high overall uncertainty, especially regarding further developments in the European sovereign debt crisis,” Weidmann said. “But we expect economic activity to remain robust in the third quarter, and even though expectations for the winter months are subject to considerable risks, this should prove to be more of a soft patch.”