By Steven K. Beckner
Bullard indicated he was satisfied with the market reaction to the
QE2 announcement.
“I think the market reaction going into the decision and since the
decision, that whole reaction has been more or less consistent with what
I would think of as the ordinary market reaction to an easing of
monetary policy,” he said.
“So in that sense I think it’s been all very conventional,” he
elaborated. “You know, interest rates fall, especially at the shorter
end; real rates are lower; inflation expectations move up a little bit;
the dollar depreciates; stocks go up. Those are all very conventional
responses to an easing of monetary policy.”
“So I think this shows that asset purchases can have very
conventional monetary policy effects, and we can go from there,” he
added. It was one of several times that Bullard analogized quantitative
easing to conventional easing.
Opponents of QE2, including a number of senior Fed official;s,
questioned its efficacy. But Bullard expressed confidence that it will
work and that, in any case, it is something the Fed must try, having run
out of room to cut the funds rate nearly two years ago.
“I think it will be just as effective as if we were targeting
interest rates and we were able to lower interest rates,” he said. “I
think we’ll have all the same type of effects that we could expect.”
But quick results should not be expected, Bullard cautioned.
“One important aspect is that the lags are still be there,” he
said. “So those effects on the economy will be six to nine months down
the road. That’s why we have to be very careful, I think, in assessing
the impact on the economy.”
“Of course, there’s a long debate about what is the effectiveness
of monetary policy generally speaking, and that debate is as alive as it
ever has been, but as far as being entirely conventional and having the
usual impacts I think that that’s a reasonable expectation,” he added.
Some have argued that QE2 is unlikely to help spur growth or reduce
unemployment much since rates are already quite low, and yet firms
remain reluctant to hire and consumers reluctant to spend, as the FOMC
acknowledged in its statement.
Bullard countered that, while “nominal rates are low on the
short-end, … it’s real rates that really matter.” And he said QE2 is
bringing down real rates.
He also addressed the argument that tax, regulatory and other
uncertainties are inhibiting growth and are not amenable to monetary
stimulus.
“I understand there are other headwinds for the economy and some of
those we can’t do very much about,” he said. “Obviously the housing
sector has got a long way to go here. We know that firms are reluctant
to hire and so on.”
“But in other times there have been other types of headwinds that
monetary policy has had to face, so we have to do our part and see if
some of those other things loosen up for us,” he added.
Bullard said QE2 will work primarily through the reduction of real
interest rates at the shorter end of the yield curve.
Bullard is not counting on the new money which the Fed will be
creating to buy Treasuries getting directly into the economy anytime
soon because of weak credit demand, coupled with the unwillingness of
many banks to increase lending. He said he’d like to see faster money
supply growth, but said that won’t occur until stronger credit demand
causes banks to convert their excess reserve accounts at the Fed into
expanded lending.
“If you just think in terms of piling on more excess reserves I
don’t think you’re going to see too much (money growth) near-term,” he
said. “I do think bank lending will pick up slowly as the economy starts
to improve. So I think you have to look at these other (channels) —
asset prices, the real rates falling, the expected inflation rising and
the other conventional effects of monetary policy — if you want to see
the impact.”
Bullard was saying that QE2 will work not by expanding the U.S.
money supply initially, but by stimulating economic activity through
lower real interest rates, increased asset prices and to some extent a
weaker dollar. Once economic activity picks up and unemployment falls,
stronger demand for credit will pull reserves out of the fed into the
economy and get faster money growth.
“That’s how I think about it,” he said after MNI capsulized the way
he thinks QE2 is likely to work in a question.
Bullard gave less precedence to the exchange rate channel than have
others.
“A lot of people have talked about the dollar,” he said. “That’s
not one that we usually worry about a lot. One aspect of the dollar is
that it’s always dependent on what monetary policy is in other countries
or Europe.”
Bullard was reluctant to say much about how dollar depreciation
resulting from QE2 might boost net exports, but observed that “the
trade-weighted value is not too different from where it has been in the
past.”
He said he and his fellow Fed policymakers “take it (the dollar) as
an input to monetary policy as to what we think will happen with trade
flows and so on. But our mandate is inflation and maximum sustainable
employment in the U.S.”
Various foreign officials have expressed concern about the impact
of QE2 on currency markets and on asset prices around the world ahead of
a Group of 20 summit in Seoul, South Korea in a few days time. But
Bullard suggested those complaints and criticisms are misplaced, again
analogizing quantitative easing to cutting the funds rate.
“You should just think if it as we moved toward an easier policy
just as we would if we could target interest rates,” he said. “And what
we got out of it was pretty conventional responses in the market. And so
it wouldn’t be any different than it would in the world of targeting
interest rates.”
“I think what’s new in this environment is that we’re not used to
it and maybe around the world we’re not used to thinking in terms of
quantitative easing as being a tool that can be used as stabilization
policy,” he continued. “And so I think everybody had the feeling like
the Fed is already at zero, they’re not going to do anything else, and
that’s turning out not to be the case, so that’s the part that’s taking
some getting used to.”
“But as far as the sort of ordinary effects of this, we took an
easing action, we got conventional responses in markets,” he went on.
“We expect it to have sort of conventional effects on economy six to
nine months from now. I think if we get stronger U.S. performance that’s
probably good for everybody globally.”
-more- (3 of 4)
** Market News International **
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