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Wednesday, 6 November 2013 00:00 - - {{hitsCtrl.values.hits}}
The three Fed officials, who are all able to cast votes on monetary policy this year, did not say exactly when they believe the stimulus should be withdrawn – a question that is front and centre for investors now that the Fed’s third round of quantitative easing (QE3) has entered its fourteenth month.
Uncertain timing
Governor Jerome Powell called the timing “necessarily uncertain” because it depends on the strength of the recovery, while Boston Fed President Eric Rosengren pointed to the central bank’s balance sheet as a reason to be patient as it heads into a policy meeting next month.
“What it’s reasonable to expect us to do is to be transparent and to move gradually when it is time to withdraw accommodation, or even to begin reducing the pace at which we add accommodation and go slowly in doing that,” Powell told the Asia Economic Policy Conference in San Francisco.
The Fed should also “hold to our obligation to only do that as demand does strengthen in the United States,” he said. “Those are the things that we can do and we must do, should do.
The Fed is buying $85 billion in long-term assets each month to boost investment and hiring by pushing down long-term borrowing costs. Last month the Fed stuck to that program, saying it needed more evidence of stronger growth before reducing stimulus. Both Powell and Rosengren voted with the 9-1 majority.
When will the Fed move?
Given a gradual drop in unemployment since QE3 was launched and worries over a swelling Fed balance sheet – now at a record $3.8 trillion – investors have been speculating about when the Fed will finally move.
“For me, you don’t have to be in a hurry because of low inflation,” St. Louis Fed President James Bullard, who also supported the policy decision, told CNBC television.
Bullard said he wanted to see inflation heading back up toward policymakers’ 2% goal before tapering bond buying. Inflation has been running much closer to 1%, he noted.
Rosengren, a long-time policy dove, highlighted data comparing two “hypothetical” approaches to quantitative easing: one in which the buying is unchanged until April 2014; and another fairly aggressive approach in which the buying is reduced to $75 billion in December, $50 billion in January, $25 billion in March, and completed altogether by April.
“Start dates differing by a quarter or two would generate only relatively small changes in the overall size of the Fed’s balance sheet,” Rosengren said at the University of Massachusetts Boston.
“That is certainly one reason for being patient – waiting until evidence of a more sustainable recovery is more clear-cut – before beginning any reduction in the size of the purchase program.
US unemployment was 7.2% in September, down from 7.8% a year ago. Gross domestic product growth has averaged 2.2% since the recession ended in 2009.
Beyond QE3:
interest rates
The Fed’s October decision to stand pat on the pace of QE3 followed a bitter partisan battle in Washington that led to a 16-day partial government shutdown and flirted with a devastating debt default.
A deal was eventually forged to reopen the government and raise the US borrowing limit until early in the new year, meaning the fiscal showdown could resume in a matter of months.
Bullard said he did not think the shutdown in itself would do lasting harm to the economy, although he acknowledged that the political fighting had hurt confidence. But the Fed should not wait for a permanent budget deal before taking policy action, he said.
“I think we can’t really wait for the political situation in Washington to be just right because, evidently, they could be bickering forever,” he said.
He also played down the impact that the central bank’s leadership transition would have on decision-taking, after President Barack Obama nominated Fed Vice Chair Janet Yellen to take over the helm from Bernanke when his term expires at the end of January. Yellen’s appointment must be confirmed by the US Senate.
“I don’t think the committee would put very much weight on anything like that,” Bullard said. He also said that he expected she would help ensure policy continuity once she was in charge.
Important factors
Powell, speaking in a conference room at the San Francisco Fed named after Yellen, devoted most of his remarks to debunking the idea that easy policy in the United States and other advanced economies has been primarily responsible for the massive capital inflows, currency appreciation and asset price rises in some emerging economies.
While accommodative monetary policies “likely contributed to some of these flow and price pressures,” he said, and may also have contributed to the build-up of potential financial imbalances in certain emerging markets, “other factors appear to have been even more important”.
Among those factors, he said, are expectations that some emerging economies will grow more slowly than before.
A fourth Fed policymaker, Dallas Fed President Richard Fisher, told a group of economists in Sydney that he does not see the Fed continuing its bond-buying program indefinitely, or increasing it.
But even Fisher, a stalwart opponent of the Fed’s current easy policy, said he could see the Fed holding interest rates low for a very long time.
Rosengren, for his part, said that when the bond-buying is ultimately reduced, rates will need to stay at “very low levels until there is much more progress reaching full employment” of 5.25% joblessness in his view. The pace at which rates are raised should be “quite gradual unless the economy picks up much faster than is currently expected,” he added.
