Two Federal Reserve officials opposed additional mortgage-bond purchases by the Fed, saying the measure isn’t needed and that the U.S. central bank shouldn’t interfere in credit markets.
James Bullard, president of the Federal Reserve Bank of St. Louis, said he doesn’t favor additional debt buying as inflation risks are “to the upside” and a damaged housing market limits the effectiveness of monetary policy. Philadelphia Fed President Charles Plosser said targeting a specific industry such as housing should be left to the U.S. Treasury.
“I am worried that if you try to push so hard on monetary policy even when the mechanism isn’t really working, the whole thing blows up on you,” Bullard, who doesn’t vote on Federal Open Market Committee this year, told reporters after a speech yesterday in New York. He also said that the FOMC would need to mark down its economic forecasts to warrant another program of large-scale asset purchases, known as quantitative easing.
Fed officials are keeping open the option of a third round of bond purchases in case the economy weakens or inflation stays low. “A few” members of the FOMC said economic conditions could warrant buying assets “before long,” and others indicated that action would become necessary if the “economy lost momentum” or price gains seemed likely to remain lower than the Fed’s 2 percent goal, according to minutes of their Jan. 24-25 meeting released last week.
“The committee is in wait-and-see mode,” said Dean Maki, chief U.S. economist at Barclays Capital in New York. “There’s a wide span between the more hawkish and more dovish views on the economy, and so the data will determine if there’s QE3. If the data hold up, as we expect, we would avoid it.”
Economic reports yesterday added to evidence of a strengthening economy, helping the Standard & Poor’s 500 Index advance to the highest level since June 2008. The S&P 500 rose 0.2 percent to 1,365.74 at 4 p.m. in New York.
Confidence among U.S. consumers rose more than forecast in February, reaching a one-year high as Americans grew more upbeat about the outlook for the economy.
The Thomson Reuters/University of Michigan final index of consumer sentiment increased to 75.3 this month from 75 in January. The median estimate in a Bloomberg News survey called for 73, after a preliminary reading of 72.5.
Purchases of new homes declined 0.9 percent in January to a 321,000 annual rate from a 324,000 pace in December that was stronger than previously reported, Commerce Department figures showed yesterday. The median estimate in a Bloomberg survey called for 315,000 pace last month.
Fed Bank of San Francisco President John C. Williams said the central bank’s home-loan security buying has been effective in bringing down mortgage-bond yields, and that the housing “bust” is weighing on the U.S. economy. Monetary stimulus is warranted to boost growth, he said, without commenting specifically on prospects for additional stimulus.
“Housing is a major factor in the deep downturn and sluggish recovery we’ve experienced in recent years,” said Williams, a voting member on the FOMC this year. “It’s one of several factors weighing on aggregate spending by consumers, businesses, and government. An aggregate-demand shortfall is something monetary policy can be, should be, and is addressing.”
The policy makers spoke at the University of Chicago Booth School of Business’s U.S. Monetary Policy Forum.
Plosser repeated his opposition to mortgage-bond buying, saying it constitutes fiscal policy.
“When the Fed engages in targeted credit programs that seek to alter the allocation of credit across markets, I believe it is engaging in fiscal policy and has breached the traditional boundaries established between the fiscal authorities and the central bank,” Plosser said yesterday.
Federal Reserve Bank of New York President William C. Dudley, disagreed. Dudley said the Fed “has not engaged in anything that in my opinion constitutes fiscal action,” and he didn’t comment on the outlook for additional stimulus.
Dudley, in a speech at the forum, warned that it is “essential” for the U.S. to aim for fiscal balance as the government’s borrowing costs will eventually increase as interest rates rise.
“We are in an unusual period in which net interest expense is temporarily depressed,” he said. “This will not last and the fiscal authorities need to factor this in when considering what needs to be done to put the federal budget deficit and the nation’s debt burden on a sustainable path.”
Dudley repeated last month’s Fed statement that low rates of resource use and subdued inflation “are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.” He is a permanent voting member of the panel.
Near Zero Rates
Under Chairman Ben S. Bernanke, the Fed has kept interest rates close to zero for more than three years and has bought $2.3 trillion in two rounds of asset purchases in an effort to push down long-term interest rates.
Ten-year Treasury notes yielded 1.98 percent yesterday, down from 3.44 percent a year ago. Two-year notes show that the government can borrow for that term at around 0.30 percent.
The Fed presidents spoke following the presentation of a paper by economists Michael Feroli of JPMorgan Chase & Co. and Ethan Harris of Bank of America Corp. The paper argued the collapse of housing and upheaval in the mortgage market was preventing the central bank’s low interest-rate policies from being as effective as in normal recoveries.
Williams said one challenge for central bankers is that “the monetary transmission mechanism is partially clogged,” making “refinancing and other housing activity less responsive to changes in interest rates.”
If monetary policy is “less powerful than usual,” that “suggests we need to move our monetary instruments even more than usual to achieve our employment and price-stability objectives,” Williams said.
Bullard disagreed with Williams’ views of how a “clogged” monetary transmission should affect policy making.
“I would disagree with the idea that, because it’s clogged up, now you have to push harder,” Bullard told reporters. “That’s the story of the 1970s” and resulted in prolonged high inflation and unemployment, he said.