Federal Reserve policy makers are improvising as they debate embarking on a second round of unconventional monetary stimulus, said Alan Blinder, former vice chairman of the U.S. central bank.
“They are making it up as they go along,” Blinder, a Princeton University economist, said in an interview with Bloomberg television’s “Surveillance Midday” with Tom Keene.
After lowering interest rates almost to zero and buying $1.7 trillion of securities, the Fed is considering expanding its balance sheet further by purchasing more Treasury securities, as well as strategies to boost inflation expectations, according to the minutes of its Sept. 21 Federal Open Market Committee meeting.
Blinder said he doesn’t project the central bank will undertake a “shock and awe” approach after its Nov. 2-3 meeting, or one designed to quickly influence the market through big asset purchases. Instead, the Fed will “dribble it out” by buying in smaller increments, he said.
His thinking is in line with comments made by St. Louis Fed President James Bullard, who said yesterday that the central bank should buy $100 billion in long-term Treasuries next month and calibrate subsequent purchases based on the course of the economic recovery. Bullard has been critical of starting a program with big purchases of assets.
The central bank will need to buy more than $500 billion of securities to successfully lower interest rates and stimulate the economy, Blinder said. “It does take a lot of money to move the prices of government bonds,” Blinder said. “$500 billion for the total amount is too small.”
New York Fed President William Dudley said in an Oct. 1 speech that further easing is “likely to be warranted.” Dudley estimated that $500 billion of purchases, for example, would add as much stimulus as reducing the Fed’s benchmark rate by 0.5 percentage point to 0.75 percentage point, depending on how long investors expect the Fed to hold the assets.
The program of asset purchases that the Fed is “about to embark upon is a lot like what the Japanese did,” Blinder said in today’s interview. The U.S. bond market is “deeper and more liquid a market,” which will make it harder for the Fed to lower interest rates through their purchases, he said.
The central bank, confronted with inflation that’s failing to reach its goals and an unemployment rate that has persisted near 10 percent, is under extra pressure to try to stimulate growth because the “American political system is paralyzed by the election,” Blinder said. “It’s the only game in town in terms of boosting the economy.”
While Blinder said he doesn’t expect the economy to slip back into a recession, he said “there is much too large a probability we get stuck around 2 percent growth for a while.”