The Federal Reserve will resume its bond purchases at some point in a strategy known as quantitative easing to bolster the economy because it wants to maintain credibility, said Vincent Reinhart, a former monetary affairs director at the U.S. central bank.
“If the unemployment rate does stay up in the neighborhood of 9.5 percent, ultimately Fed officials are going to say they’ve got a reputational risk, that if they’re not seen as acting in a time of severe macro distress their reputation will be impaired,” Reinhart said in a radio interview today on “Bloomberg Surveillance” with Tom Keene. “Ultimately, QE2 will leave the dock.”
The U.S. unemployment rate climbed to 9.6 percent in August from 9.5 percent in July and is forecast to average more than 9 percent through next year.
The central bank is unlikely to announce an expansion of bond purchases today, as policy makers continue to have concern about whether it’s the right decision, said Reinhart, a resident scholar at The American Enterprise Institute in Washington.
Economic data remained weak during the first four weeks after the Fed’s Aug. 10 decision to use the maturing proceeds from its portfolio to buy Treasuries, though it has improved enough during the past two weeks to sow doubt about the need for more buying, Reinhart said.
“It’s a committee that is split,” Reinhart said.
Investors should look to the Fed’s statement that will be released at about 2:15 p.m. to determine what direction the central bank will take, Reinhart said. If policy makers discuss using the central bank’s balance sheet as a means to achieve policy goals, that would suggest more debt purchases, he said.
The Fed said in November 2008 that it would buy $500 billion of mortgage securities and $100 billion of agency debentures. In March 2009 the bank increased those targets to $1.25 trillion mortgages and $200 billion in agency debt while also committing to buy $300 billion of Treasuries.
Monetary policy has taken on increasing importance because other areas where policy makers might advance ideas to improve the economy are consumed in political struggles and the run-up to Congressional elections in November, Reinhart said.
“They have limited scope to do more,” said Reinhart, who worked at the Fed from 1983 until 2007. “The fact that we’re focusing so much on monetary policy shows how poorly we’re doing with everything else.”