“We do not expect this adjustment to our purchases to produce significant upward pressure on interest rates or a tightening of broader financial conditions,” Sack said in the text of remarks given in New York today.
The Federal Open Market Committee voted on June 22 to conclude its $600 billion bond-buying program as scheduled at the end of last month, and to maintain its balance sheet near record levels by reinvesting proceeds from its securities holdings. The FOMC also affirmed its pledge to keep its benchmark interest rate near zero for an “extended period.”
The pace of the Fed’s bond purchases will drop to about $15 billion a month from about $100 billion a month through June, Sack said.
“While there has been considerable volatility in Treasury yields over the past several weeks, we attribute those movements primarily to incoming economic data and to broader risk events,” Sack said.
Policy makers cut their forecasts for growth this year before a July 8 government report showed that employers added 18,000 jobs last month, the fewest since September. Chairman Ben S. Bernanke told Congress last week that while the economy “still requires a good deal of support,” officials have no immediate plans for further stimulus.
“The disappointing pace of recovery that has been realized” since the Fed announced its asset-purchase plan last year suggests it “was appropriate,” Sack said. It’s a “reasonable observation but not a strong criticism” that the purchases were “unable to restore vigorous growth to the economy,” Sack said in a speech to the Money Marketeers of New York University.
The Fed’s second round of so-called quantitative easing, dubbed “QE2” by analysts, sparked the harshest political backlash against the U.S. central bank in three decades.
Bernanke said last week that Fed officials are waiting to see whether the economy changes before altering their stance and embarking on another round of stimulus.
“We’re not proposing anything today,” Bernanke said to the Senate Banking Committee on July 14 in Washington. “We just want to make sure that we have the options when they become necessary. But at this point, we’re not proposing to undertake that option,” he said, referring to a third round of purchases.
Should policy makers deem it necessary to provide additional stimulus, the Fed could further expand its balance sheet, or buy longer-term securities to alter the composition of its portfolio, Sack said. The FOMC could also provide more details on how long it expects to hold the assets, he said.
Fed policy makers have disagreed on whether additional monetary stimulus will be needed even if the outlook for economic growth remains weak, minutes of their meeting last month showed. Some members said a further slowdown in growth would signal a need for additional support, while others said the growing risk of inflation would require withdrawing stimulus sooner than currently anticipated.
If the Fed allowed all types of securities it owns to run off, the portfolio would shrink by an average of $250 billion a year “over the first several years,” Sack said.
The Fed lowered its target for the federal funds rate, which banks charge each other for overnight loans, to between zero and 0.25 percent in December 2008. The central bank’s balance sheet swelled to a record $2.88 trillion last week.
The portfolio’s duration, a measure of interest-rate sensitivity, was more than 4.5 years at the end of June, compared with a “historical range” of between two and three years, Sack said.
“Transferring this additional duration risk to the Federal Reserve’s portfolio, and hence out of the portfolios of market participants, was one channel through which the asset purchase program was intended to have its effect on financial conditions,” Sack said.
He said the Fed’s portfolio will earn about $500 billion from 2009 to 2018, “about $90 billion in excess of what we project would have been realized in the absence of asset purchases.”
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