By Steven K. Beckner

NEW YORK (MNI) – When it comes to possible further monetary
stimulus, most of the speculation has focused on additional asset
purchases, but there are other tools the Federal Reserve could consider.

However, those other tools — changing Fed communications and
cutting the interest the Fed pays on excess reserves — are less likely
to have a significant impact, according to Boston Federal Reserve Bank
President Eric Rosengren.

Rosengren, a voting member of the Fed’s policymaking Federal Open
Market Committee, put more emphasis on possible large asset purchases —
both Treasury securities and mortgage backed securities — in an
interview with Market News International Wednesday. But he also spoke of
the pros and cons of communications strategy and the IOER.

He noted that Fed Chairman Ben Bernanke “did not rule out” cutting
the IOER or changing Fed policy guidance to imply an even longer
“extended period” of near zero short-term interest rates when he spoke
of them in his Aug. 27 speech to the Kansas City Federal Reserve’s
Bank’s Jackson Hole symposium.

“Which tool you use depends on the circumstances of the economy,”
said Rosengren.

For example, “if the market thought we were going to tighten at the
next meeting then we don’t necessarily have to buy securities,” he said.
“We can just make clear through communication that that’s not the plan,
and that’s not the plan for a reasonable period of time.”

“If instead the market has already factored in an ‘extended
period’ before we start tightening, then going from two years to three
years may not give you that much benefit,” Rosengren said.

“So the communication strategy partially depends on how aligned
private sector forecasts of what we’re going to do are with what we
think is appropriate policy,” he said.

“If those are misaligned that’s a communication issue, and that’s
what we should focus on,” he continued. “If instead the market is pretty
similar to our own view it’s not a communication issue, it’s a do-ing
issue.”

As for possibly reducing the IOER from the current 25 basis points,
Rosengren observed, “We’re pretty low now.” So he said the effect of
cutting it further is “a little bit uncertain.”

But he suggested it is not out of the question to use an IOER cut
as part of a communication strategy.

“If your goal is to have an impact, for example, on making a
commitment to not have further disinflation, then making the connection
publicly between the IOER and that may be difficult to communicate in a
way that’s effective,” he said.

“And so which policy tool we take depends on which channel you’re
trying to affect and where market expectations are at the time,” he
added.

“Right now, large asset purchases are considered because I think
the communication is relatively straightforward, at least on what we’re
doing,” he said.

** Market News International **

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