By Steven K. Beckner

ST. LOUIS (MNI) – The Federal Reserve’s large-scale asset purchases
did not reduce the value of the dollar as much as expected, but reduced
it enough to help stimulate the economy by boosting exports, according
to a research paper presented Thursday at a St. Louis Federal Reserve
Bank conference on quantitative easing.

St. Louis Fed vice president and economist Christopher Neely said
the foreign exchange rate effects of quantitative easing shows that
large scale asset purchases were “not toothless.”

He said the dollar depreciated 6.5% overall and 11% versus the
Japanese yen.

Whatever domestic effects Q.E. had — and economists at the
conference differed about that — Neely contended it had significant
international effects, by affecting foreign bond yields and exchange
rates.

He said the exchange rate effects were only about “half” as much as
predicted by various economic models. Nevertheless, QE’s “success in
reducing international long-term interest rates and the value of the
dollar shows that central banks are not toothless when short rates hit
the zero bound,” he said.

“The success of the LSAP in reducing long-term interest rates and
the value of the dollar shows that central banks are not toothless when
short rates hit the zero bound,” Neely said.

“Contrary to long and widely held conventional wisdom, large asset
purchases can affect both domestic and international long rates,” he
continued. “And monetary policy effects at the zero bound include
international channels.”

Neely said “the reduction in foreign bond yields and the value of
the USD is likely to have stimulated the U.S. economy through export
channels, for example.”

“From an international perspective, these findings imply that
central banks should coordinate their asset purchase policies to avoid
contradictory or overly stimulative effects,” he added.

Earlier, St. Louis Fed President James Bullard said one of the
“classic” monetary effects of QE2 was to weaken the dollar.

“Of course we’re not targeting the dollar,” Bullard said, “but you
would expect that when you ease monetary policy in the U.S. and the rest
of the world stays constant you would expect the dollar to depreciate.”

** Market News International **

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