Sack Says Fed's Asset Purchases Have Led to `More Accommodative' Markets
“The Federal Reserve’s balance sheet actions have helped to make broader financial conditions more accommodative,” Sack said in the text of remarks given in Philadelphia today. “Risky asset prices such as equities have risen at a rapid pace, and credit spreads and measures of credit availability have continued to ease.”
Sack is among Fed officials defending the central bank’s decision last month to press ahead with its plan to buy $600 billion of bonds through June in an effort to create jobs. Republican Representative Paul Ryan of Wisconsin, chairman of the House Budget Committee, today repeated his criticism of the purchases, saying they risk creating asset-price bubbles and fueling inflation.
“The recent asset purchases by the Federal Reserve have had helpful effects on financial conditions and have been implemented in a manner that has been flexible enough to avoid any significant negative consequences for the functioning of financial markets,” Sack said.
Fed Chairman Ben S. Bernanke said in testimony before the House budget panel today that the unemployment rate is likely to remain high “for some time” even after its biggest two-month drop since 1958, to 9 percent in January. Joblessness rose above 9 percent in May 2009, beginning the longest period of unemployment at that level or higher since monthly records began in 1948.
Adding to Concerns
Ryan today said an increase in long-term Treasury yields this week “certainly adds to these concerns” about inflation. The benchmark 10-year Treasury note yields 3.65 percent, up from 2.57 percent on Nov. 3, the day the Fed announced its asset- purchase program.
The increase “in large part reflects the greater optimism among investors about the outlook for economic growth,” Sack said. “The rise in yields does not appear to be driven by the concerns expressed by some that the asset purchase program would unleash a considerable rise in U.S. inflation.”
Sack said in response to audience questions that rising Treasury yields reflect that “there’s a lot more confidence in the markets that we’re seeing the beginnings of a more sustained, robust recovery.” Equity prices “should have come down,” if that weren’t true, he said. The Standard & Poor’s 500 Index has gained more than 10 percent since Nov. 3.
Bernanke said today that “inflation is expected to persist below the levels that Fed policy makers have judged to be consistent” with their dual mandate from Congress for stable prices and maximum employment.
Sack said while the central bank has been pressing ahead with quantitative easing, it has also been preparing to withdraw its record monetary stimulus.
“Even as the Federal Reserve has been expanding its balance sheet, it has not lost any momentum in the preparation of its exit tools,” Sack said. “We continue to make considerable progress increasing our capacity to drain reserves if necessary.”
More than 500 depository institutions have registered for the Fed’s term deposit facility, and 58 money-market funds have been added as counterparties for reverse repurchase agreements, Sack said. Last week, the Fed also added two firms as primary dealers, or counterparties to the central bank’s transactions.
“We have already established considerable capacity to drain reserves with these two tools, and we will continue to advance them in productive directions,” Sack said.
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