–Need to See Economy Improve, Not Just Avoid Deterioration
–Has ‘Open Mind’ But Favors QE2 If No Improvement
By Steven K. Beckner
NEW YORK (MNI) – Boston Federal Reserve Bank President Eric
Rosengren said Wednesday that the Fed should consider purchasing more
mortgage-backed securities as well as Treasury securities if it decides
to resume quantitative easing.
Rosengren, a voting member of the Fed’s policymaking Federal Open
Market Committee, said in an interview with Market News International
that he will go into the Nov. 2-3 meeting with an “open mind” about
whether or not the Fed should inject more monetary stimulus into the
economy.
However, he made clear that he would favor a resumption of
quantitative easing if the economy does not show improvement on both
unemployment and inflation. Further deterioration is not necessary to
justify Q.E. in his mind.
Rosengren was more dubious about the merits of changing the Fed’s
communication strategy to raise inflation expectations and lower rates,
saying he doesn’t perceive there to be a communication problem with the
market. He was also skeptical as to whether cutting the already
bare-bones interest rate on excess reserves would accomplish much.
Rosengren’s comments, coming on a day when two other top officials
spoke, illustrated the wide divergence of views among FOMC members on
what the Fed should do to support a sluggish and disinflationary
recovery. While Rosengren made clear in a speech his leanings toward
additional Q.E., two Fed presidents who will vote on the FOMC next year
were more cautious.
Naryana Kocherlakota of Minneapolis questions whether bond buying
would exert much additional downward pressure on already very low rates
or do much to boost the subnormal inflation rate. Philadelphia’s Charles
Plosser opposes renewed “quantitative easing” unless the economy faces
actual deflation. He says it would do little to boost jobs and could
hurt the Fed’s credibility.
Most Fed officials, including Chairman Ben Bernanke, have spoken in
terms of buying longer term Treasuries should the Fed launch a new round
of quantitative easing. And some Fed officials are adamantly opposed to
buying MBS again.
But, interviewed following his speech to the Forecasters Club of
New York, Rosengren indicated he would also favor renewed MBS purchases
under the right circumstances.
He stressed that the Fed’s choices on the amount and type of asset
purchases would be “situational.”
Asked whether he would favor buying MBS, Rosengren replied, “I
think we should have an open mind as to what is the most effective
policy to get the desired result.”
“So previously we made an assessment that it would be
disproportionately mortgage backed securities,” he continued. “I think
we have to look, at each of these meetings, in that context and decide
where we’re going to have the biggest impact … . Which of those assets
we purchase should depend on what impact we’re trying to have and what’s
going to have the biggest impact on the overall economy.”
Rosengren observed that “there are different costs as to whether
you pick mortgage-backed securities or Treasuries.”
“With mortgage backed securities, people become worried about
credit allocation,” he explained. “There is less credit allocation when
we’re buying Treasury securities, but when we’re buying mortgage backed
securities it doesn’t have the same appearance of monetizing the debt.”
“When we buy Treasury securities it has more appearance of
monetizing the debt,” even though that is not the intention,” he went
on, adding that the Fed will have to weigh “both the benefits and the
costs” of buying Treasuries or MBS.
Later in the interview, Rosengren said that “if we decide to do
something going forward, I think we should take a hard look at purchases
of Treasury or mortgage-backed securities.”
In his speech and later in the interview, the Boston Fed chief
stressed that the Fed is “missing” on both aspects of its dual mandate,
with unemployment far above and inflation far below the Fed’s stated
goals.
He declined to say that he favors renewed Q.E. now, but made clear
he is strongly leaning toward it in the absence of improvement in the
outlook. By contrast, other officials have spoken of possible renewed
asset purchases if the outlook deteriorates further.
Bernanke, in his Aug. 27 speech to the Kansas City Fed’s Jackson
Hole conference, said the FOMC should be prepared to provide more
stimulus if the outlook were to “deteriorate significantly.”
Rosengren suggested he has a much lower bar for resuming Q.E.
“Our goal is to reach our target in a reasonable amount of time for
both employment and inflation, and if it looks like we’re not going to
get there in a reasonable period of time, and if other policies such as
fiscal policy aren’t going to fill the gap, then it is appropriate for
monetary policy to try to reach those goals,” he said.
“So certainly if you were in an environment where the inflation
rate was going down and where the unemployment rated was going up that
wouldn’t get us close to where we want to go,” he continued. “So we need
to factor in between meetings (if there) is anything that changes the
path; is the data consistent with whether you think this is a lull or a
longer period of much slower growth.”
He said the Fed should also take into account foreign as well as
domestic financial conditions.
As to whether he is prepared to support “QE2″ right now, Rosengren
responded, “At each meeting I go in with an open mind. I have a
viewpoint of how I’m seeing the data, but I think that it would be wrong
to precommit to what I’ll think a month in the future because there is
data that would convince me that we should do something differently. So
I think it’s more situation dependent.”
However, as far as Rosengren is concerned, the Fed need not
necessarily wait for further deterioration in the job or inflation
picture to begin expanding its balance sheet and bank reserves.
Asked whether failure of the economy to improve and not merely
further deterioration would justify Q.E., he replied that “both” would
provide such justification.
“If unemployment was going to stay at 9.6% and the core (consumer
price index) was going to stay at nine tenths of a percent for as far
as the eye can see that would not be getting us where we want to go,” he
said.
“So it’s not just moving away from where we are, we need to see
improvements from where we are because we’re not where we want to be,”
he went on. “No one thinks 9.6% unemployment is full employment, and …
I think it’s pretty clear we’re well below 2% by a variety of inflation
measures.”
Asked whether the FOMC should authorize increased asset purchases
on the basis of shortfalls from its late June forecast or wait to see if
the economy lives up to the November forecast, Rosengren said “the
forecast is an important element of what we consider” and said the Fed
has already changed policy based on the economy’s failure to fulfill the
June forecast and said it should be prepared to do more.
Noting that, on Aug. 10 the FOMC voted to reinvest proceeds of
maturing MBS in Treasury securities to avoid “an implicit tightening,”
he said “we have been reacting to some of the incoming data already.”
“And if the incoming data don’t improve we should continue to
consider whether more action is necessary,” he added.
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** Market News International **
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