–Need Full Employment, Appropriate Inflation in ‘Reasonable Timeframe’
By Steven K. Beckner
NEW YORK (MNI) – Boston Federal Reserve Bank President Eric
Rosengren strongly suggested Wednesday that he is leaning toward
favoring renewed quantitative easing to stimulate the economy, bring
down unemployment and avoid further disinflation and possible deflation.
Rosengren, a voting member of the Fed’s policymaking Federal Open
Market Committee, said the FOMC must be “open to implementing” policies
that will promote full employment and reduce disinflationary risks
“within a reasonable time frame.”
And Rosengren predicted that purchases of Treasury securities by
the Fed would reduce not only Treasury yields, but also other long-term
interest rates in remarks prepared for the Forecasters Club of New York.
By resuming Q.E., he said the Fed would be doing nothing more than
lowering market rates to levels they would have reached had the Fed been
able to continue cutting the federal funds rate.
The Fed has held its funds rate target between zero and 25 basis
points since December 2008, and resorted last year to purchases of more
than $1.7 trillion in Treasury securities, agency debt and
agency-guaranteed mortgage backed securities.
Those purchases were concluded at the end of March, but at its
Sept. 21 meeting, the FOMC declared, “The Committee will continue to
monitor the economic outlook and financial developments and is prepared
to provide additional accommodation if needed to support the economic
recovery and to return inflation, over time, to levels consistent with
its mandate.”
Fed Chairman Ben Bernanke, in his Aug. 27 speech to the Kansas
City Federal Reserve Bank’s Jackson Hole symposium, had expressed a
clear preference for using additional Treasury purchases if the outlook
“deteriorates significantly.” And Rosengren seemed to echo that
preference.
Rosengren made clear he is not inclined to sit on the sidelines and
withhold additional monetary stimulus, although he did not give a precise
trigger point or threshold for renewed asset purchases.
“These days, as in past recoveries, it is not uncommon to hear some
observers say that there is little that policymakers can or should do,”
he said. “This is not my perspective.”
Citing the interest rate guidelines of so-called Taylor Rule
models, Rosengren said that “given the very low level of inflation and
the very high level of the unemployment rate, the Fed would have
continued to reduce the funds rate over the past two years, but for the
zero lower bound.”
Since the Fed can’t cut the funds rate anymore, he suggested,
unconventional policy measures must be pursued. And he indicated that he
thinks they should be used without much further delay.
“In my view, current economic conditions — an unemployment rate
near 10%, sluggish growth, and undesirably low inflation — together
constitute a serious economic problem,” he said.
“While it’s clear to everyone why a high unemployment rate is a
problem, one of the reasons we worry about a too-low rate of inflation
is that the closer to zero the inflation rate gets, the greater the risk
it could fall into a harmful deflation,” he added.
In the face of those problems, “we do have options, despite having
pushed short-term rates to the zero lower bound,” Rosengren said.
He conceded that “one of the challenges is that with unconventional
policies, costs can be apparent but benefits more indirect, and harder
to track.”
But he extolled the benefits of past Q.E.
“The Federal Reserve’s large-scale asset purchases — primarily
purchases of mortgage-backed securities — arguably had multiple
effects, including maintaining market function in the mortgage markets,”
he said. “But in my view their primary impact on the economy was
achieved by reducing mortgage rates.”
Rosengren recalled that mortgage rates declined from around 6% to
near 5% as the Fed’s MBS purchases accumulated and said “it also appears
that by ‘removing duration’ from the market, other long-term rates were
also reduced in response to our purchases.”
Rosengren acknowledged “concerns about things like creating
distortions in credit allocation, complicating exit strategies when they
become appropriate, and exposing the Federal Reserve to interest-rate
risk.”
However, he added, “We cannot take lightly how far off the mark
unemployment and inflation seem to be.”
Rosengren said that purchases of long-term Treasury securities “are
likely to push down long-term interest rates on Treasury bonds, but also
are likely to reduce rates on other long-term securities.”
He noted that “U.S. Treasury rates are still well above the zero
bound, roughly equivalent to rates in Germany, and well above long-term
rates in Japan.’
There are potential negatives that also must be weighed, Rosengren
said.
“While purchases of Treasury securities have the advantage of not
directly ‘allocating credit’ to a particular industry, they have the
disadvantage of only indirectly affecting the private borrowing rates
that more directly affect private investment spending,” he said. “In
addition, Treasury purchases raise for some a concern that the Fed
intends to monetize the federal debt, using monetary policy to
accommodate the financing of fiscal policy.”
But Rosengren reassured his audience that “we have no desire or
intention whatsoever to do so.”
Nor was he concerned about the potentially inflationary
implications of expanding the Fed’s balance sheet and the supply of
excess reserves in the banking system. On the contrary, he said it would
have a salutary effect on inflationary expectations — keeping them up.
“While lower long-term rates are likely the primary channel through
which asset purchases would influence the economy, purchases of Treasury
or mortgage-backed securities also expand the Federal Reserve’s balance
sheet and increase the amount of reserves in the financial system,” he
said. “This expansion of reserves might serve as an effective signal
that highlights the determination of the Federal Reserve to reduce
disinflationary pressures.”
Rosengren said “views on securities purchases differ within the
ranks of policymakers and all manner of observers.”
But he stressed, “it is important to keep firmly in mind the goal
of such purchases: to stimulate the economy by reducing long-term
interest rates to a level that is more consistent with where they would
be, were we able to further reduce the federal funds rate.”
“Of course, policymakers need to carefully weigh the benefits and
costs of unconventional monetary policy,” Rosengren said in closing.
“Yet all in all, my firm view is that it is important that policymakers
be open to implementing policies consistent with achieving full
employment, and an appropriate level of inflation, within a reasonable
time frame.”
** Market News International **
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