Investors should be able to update their expectations for monetary policy more frequently now that the Federal Open Market Committee has linked its asset purchases to economic conditions, said Simon Potter, executive vice president at the Federal Reserve Bank of New York.
“The advantage of the current policy is that it relates asset purchases to economic conditions and the efficacy and costs of the policy in a more explicit and transparent manner,” Potter told the Forecasters Club of New York. “This should enable market participants to recalibrate their expectations more continuously in light of incoming information.
The FOMC decided March 20 to press on with purchases of long-term debt that have ballooned the Fed’s balance sheet to a record $3.21 trillion.
The Fed panel reiterated its plan to leave its key interest rate near zero as long as unemployment remains above 6.5 percent and the outlook for inflation is less than 2.5 percent.
The central bank plans each month to continue buying $40 billion of mortgage-backed securities and $45 billion of Treasury securities ‘‘until the outlook for the labor market has improved substantially.’’
Potter said the Fed has bought about $130 billion in Treasuries since January and about $260 billion in agency mortgage-backed securities since September. Potter is in charge of the System Open Market Account, the New York Fed portfolio that implements the committee’s monetary policy.
Potter said in response to questions after his speech that the New York Fed should have no trouble selling the assets if the FOMC directs it to do so.
‘‘It’s very easy to do,” Potter said. “Part of that is to give the market a good feeling for what that sales strategy will be and it’s supposed to be a slow, predictable sales strategy.”
The New York Fed’s January survey of primary dealers in government bonds showed investors expect the central bank to purchase about $1 trillion in securities from 2013 until early 2014, he said.
“The current purchases reduce interest rates and ease financial conditions through the same transmission channels as previous purchase programs,” Potter said. After selling assets to the Fed, “investors may rebalance their portfolios by investing in other assets, raising the prices of those assets, lowering their yields, and easing overall financial conditions.’
‘‘The Federal Reserve’s asset purchases are designed to remove risk from the portfolios of private investors,” he added.
The central bank cut its benchmark lending rate to a range of zero to 0.25 percent in December of 2008. Unable to push the main interest rate lower, Federal Reserve Chairman Ben S. Bernanke used the size and composition of the Fed’s balance sheet as a new tool to push down longer-term rates.
Central bankers engaged in three rounds of quantitative easing, including a move last September to expand the balance sheet further with $40 billion a month in mortgage-backed securities purchases. In December, the FOMC expanded its third round of so-called quantitative easing, adding $45 billion in monthly Treasury purchases.
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