By Steven K. Beckner
JEKYLL ISLAND, Ga. (MNI) – The Federal Reserve has the flexibility
to adjust the amount of its quantitative easing up or down, according to
St. Louis Federal Reserve Bank President James Bullard.
The Fed’s policymaking Federal Open Market Committee, of which he
is a voting member, will decide whether or not to extend or expand the
Treasury securities purchases it approved last Wednesday based on its
judgment of how the economy is responding, Bullard told Market News
International late Friday.
He said the Fed does not have specific, numerical goals or trigger
points by which to judge the impact of the new asset purchase program.
Bullard was interviewed on the sidelines of an Atlanta Fed
conference at the 1910 birthplace of the Federal Reserve system two days
after the FOMC announced purchases of $600 billion of longer-term
Treasuries by the end of the second quarter of 2011 “to promote a
stronger pace of economic recovery and to help ensure that inflation,
over time, is at levels consistent with its mandate.”
The New York Federal Reserve Bank said it anticipates total
Treasury security purchases over that period of $850 billion to $900
billion, including previously authorized reinvestments of mortgage
backed security proceeds.
Bullard said the new round of quantitative easing or “QE2,” which
is designed to bring down long-term interest rates, should work in much
the same way as traditional cuts in the short-term federal funds rate.
And like conventional monetary easing, he said it will likely work with
a lag of six to nine months.
Unemployment will remain too high and inflation too low “for
a while,” he said.
The market reaction to the FOMC announcement has been similar to
the kind of reaction the Fed has gotten in the past to conventional
monetary easing, he said.
Although some of his colleagues have suggested the FOMC should be
prepared to resume buying mortgage backed securities, as it did in the
first round of quantitative easing, Bullard said he would be reluctant
to support that.
But in other respects, he said the new asset purchase program will
be “open-ended,” as well as “state contingent.”
Bullard anticipated that initially QE2 will further boost excess
reserves and not result in much faster money supply growth, but he said
it should spur economic activity, job creation and in turn bank lending.
That, in turn, will cause reserves to flow out into the economy and
cause faster growth of the money supply, he said.
Bullard acknowledged that there are “headwinds” that could limit
QE2’s effectiveness, but suggested the Fed was nonetheless obligated to
try to give the economy a boost by pushing long-term rates down further
since it can no longer cut short-term rates.
He said that a firming of monetary policy is some ways off, but
said that when the time comes, the Fed should first sell assets to
shrink its balance sheet and not simply rely on run-offs of maturing
securities to reduce the size of the Fed’s securities portfolio or use
other reserve draining techniques.
He said the FOMC must be careful not to overstay its highly
accommodative monetary policy, but said the eventual decision to tighten
policy will be essentially no more tricky than usual. And he expressed
confidence that the Fed will be able to use its various “exit” tools
efficiently.
Interviewed on a day when the Labor Department announced a much
bigger-than-expected 151,000 rise in non-farm payrolls, coupled with
substantial upward revisions to prior months, Bullard called the data
“encouraging,” but suggested they likely would not have changed the
FOMC’s decision two days earlier.
“It’s not really enough to substantially alter the forecast,” he
said. “It’s one month’s numbers. I think it’s encouraging. Hopefully
we’ll get more jobs growth going forward.”
Bullard noted he has been “an advocate of doing quantitative easing
in a state contingent way so that we are watching the data as it comes
in and reassessing our views about the economy. And we can make changes
to the program if we think it’s appropriate.”
So he said he “was encouraged to see the sentence get put right in
the paragraph about the asset purchases, that said the Committee will
review the decision every meeting.”
Bullard was referring to the FOMC’s Nov. 3 policy statement. After
announcing the additional asset purchases, the FOMC said it “will
regularly review the pace of its securities purchases and the overall
size of the asset-purchase program in light of incoming information and
will adjust the program as needed to best foster maximum employment and
price stability.”
Before last week’s meeting, Bullard had advocated that the FOMC
begin by announcing $100 billion of quantitative easing until the
following meeting, then reassess how much more asset purchases were
needed, rather than announce a large QE2 amount up front. But he
indicated he was not greatly dissatisfied with the FOMC’s decision to
announce $600 billion or $75 billion per month through mid-2011 because
he said the FOMC gave itself flexibility to adjust that amount up or
down.
“I’m not as much in favor of just naming these very large numbers,”
he said. “It takes some of the ability of the Committee to adjust going
forward away.”
But Bullard added, “I still think we could adjust … . If the data
was very strong, we could do a smaller amount. If it’s weaker we could
continue the program starting next year.”
Bullard said he “was unsuccessful in completely converting
everybody over to the idea that we should just go meeting by meeting and
set up some expectations about what kinds of things we were trying to do
and let the program be open-ended.”
However, “there is some openendedness to it, which I think is
helpful, and that’s part of the state-contingent approach … . You’re
taking the action because you have goals, not just because you want to
surprise markets on a particular day.”
Probed on how flexible the FOMC is prepared to be on the size of
asset purchases, Bullard began by saying, “there is a tension between
offering some forward guidance to markets versus wanting everything to
be state-contingent and reviewable at every meeting,”
He said “the $600 billion is a way of saying the way the forecast
looks right now and the way current information on the economy looks
right now it looks like we’re going to continue to buy assets at this
$75 billion-per-month pace probably through the first half of next year.
That’s what the Committee is saying.”
“But I think it could be adjusted in either direction,” he
continued. “But given the outlook now, as it looks like now, it looks
like we will follow through on that and reassess at that point.”
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