Fed Needs to Broaden Assets It Can Buy : Economics


By Michael S. Derby March 6, 2020 2:04 pm ETFederal Reserve Bank of Boston President Eric Rosengren said on Friday the U.S. central bank may need the power to buy a broader array of bonds to provide stimulus given the sharp and historic decline in Treasurys yields amid the coronavirus outbreak.He said the declines in U.S. government debt, most notably in the 10-year note, means that if the Fed runs out of room to lower rates, it also faces a very strong chance that Treasury bond buying—which featured prominently in the financial crisis and its aftermath as a stimulus tool—won’t provide much of an economic boost either.“There would be little room for the Federal Reserve to lower rates through large purchases of long-term Treasury securities—like it did to make conditions more accommodative in and after the Great Recession —if a recession occurred in this rate environment,” the official said in the text of a speech for delivery at the gathering of the Shadow Open Market Committee, a group that weighs in on central bank issues, in New York. He didn’t offer a prediction for the path of monetary policy.In such a situation, the Fed may need the ability to buy securities beyond the Treasury, mortgage and agency debt it can now hold. “We should allow the central bank to purchase a broader range of securities or assets,” Mr. Rosengren said.Buying other assets would require Congress to change the law governing the Fed, but it would give the central bank a way to provide stimulus when its older strategies won’t do much, Mr. Rosengren said.Mr. Rosengren’s comments were his first public remarks since the Fed’s emergency rate cut on Tuesday. Then, the central bank lowered its fed funds target-rate range by half a percentage point to between 1% and 1.25%, in a bid to protect an otherwise healthy economy from risks presented by the coronavirus.Mr. Rosengren said the spread of coronavirus is both a supply and demand shock to the economy, adding that while monetary policy can’t do much to offset the former, it can help on the latter front. He said supply shocks can create issues for the overall state of financial conditions, and because of that, monetary policy can help mitigate some of the impact of events like those surrounding the coronavirus.Financial markets expect additional rate cuts and a move back to zero, even as Fed officials have thus far been cautious about ratifying that outlook. Still, in a speech Thursday, New York Fed chief John Williamssuggested further action is possible.Lowering short-term rate to near zero again has sparked concern about where the central bank will find stimulus. Mr. Rosengren’s suggestion that the Fed look beyond what it can buy is novel—and is likely to be part of a broader debate as the central bank confronts fast moving events that could sharply limit its ability to help the economy.Mr. Rosengren’s proposal to broaden the array of assets the Fed can buy is sure to be controversial. Fed purchases of private assets runs the risk of the central bank picking winners and losers in the economy, something the central bank has long wanted to avoid.The Boston Fed leader isn’t currently a voting member of the rate-setting Federal Open Market Committee, but he was last year. Then, he was a consistent opponent of the central bank’s three rate cuts last year. He didn’t comment on the Fed’s Tuesday action in his formal remarks.But Mr. Rosengren did say he saw little value for the Fed in using negative interest rates as a stimulus tool, echoing the views of other Fed officials. “Negative interest rates poorly position an economy to recover from a downturn,” he said.He also said that government spending and taxation policies would also be key should the Fed face limited monetary policy power.“In a low-interest-rate environment, the obvious alternative to monetary policy in a downturn is to depend on fiscal policy shouldering a greater share of the burden for providing needed stimulus to the economy,” Mr. Rosengren said. “Somewhat surprisingly, there seems to be little movement toward making automatic stabilizers more prominent, or preparing to invest significantly more in the sorts of public investment projects that yield positive returns.”Write to Michael S. Derby at michael.derby@wsj.com


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