Reinhart Sees 50% Odds Federal Reserve Will Buy More Assets

Former director of monetary affairs Vincent Reinhart
Vincent Reinhart, resident scholar at the American Enterprise Institute in Washington. Photographer: Joshua Roberts/Bloomberg

Odds are about 50 percent that the Federal Reserve will buy additional assets to keep its balance sheet stable and stimulate a slowing U.S. economy, said Vincent Reinhart, a former director of monetary affairs at the Fed.

“I think it is about a coin toss,” said Reinhart, a resident scholar at the American Enterprise Institute in Washington, in an interview today on Bloomberg Radio’s “Bloomberg Surveillance.” “If Chairman Bernanke wants it done, he could get it done,” he said.

Ben S. Bernanke and colleagues at the central bank, during a one-day meeting today, are expected by economists to keep the overnight interbank lending rate target unchanged in a range of zero to 0.25 percent, where it’s been since December 2008, and retain a commitment to keep rates that low for “an extended period.”

Fed officials may also discuss whether additional stimulus is needed amid signs that economic growth is slowing and deflation, or falling prices, could be a risk. One option is for the Fed to maintain the current size of its balance sheet, $2.3 trillion, by buying new assets as the mortgage-backed securities in its portfolio mature, Reinhart said.

Reinhart said that move, which he called a “token move toward quantitative easing,” could be slowed by divisions on the committee. Thomas Hoenig, head of the Kansas City Fed, is opposed to more easing, while others such as James Bullard of St. Louis and Eric Rosengren of Boston may favor a move, he said.

“It is a divided committee,” Reinhart said. “You can’t move a divided committee really quickly.”

Outlook for Growth

Bernanke said last month the outlook for growth was “unusually uncertain,” and signaled that signs of deeper economic weakness would be needed to justify more stimulus. On Aug. 2, Bernanke said rising wages will probably spur household spending in the next few quarters.

“Probably it makes more sense for him to wait until September,” Reinhart said. “You get those extra governors, you get a new vice chairman. It will be easier to do then.”

Policy makers are scheduled to release a statement at about 2:15 p.m.

The statement will need to acknowledge slowing in the economy and indicate that the source of the slowdown is U.S. demand rather than circumstances abroad, Reinhart said.

“They have to truth-up the statement, bring it back to reality,” he said.



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