Bernanke to Weigh QE Costs as Fed Assets Approach Record
Federal Reserve Chairman Ben S. Bernanke indicated that the central bank is weighing the potential costs from its $85 billion in monthly purchases of bonds while saying the unorthodox easing bolsters the economy.
“So far, we think we are getting some effect, it is kind of early,” Bernanke said yesterday at the University of Michigan’s Gerald R. Ford School of Public Policy in Ann Arbor. “We are going to continue to assess how effective” the program is “because it is possible that as you move through time and the situation changes that the impact of these tools could vary.”
The Federal Open Market Committee last month decided to add $45 billion in monthly purchases of U.S. Treasury notes to its program buying $40 billion of mortgage-backed securities each month. The committee set no limit on the size or duration of the bond purchases.
Minutes from the Dec. 11-12 meeting showed that even as they were preparing to launch new Treasury purchases, “several” FOMC members said it would “probably be appropriate to slow or stop buying well before the end of 2013.” A “few” others were willing to let the program run to the end of the year, while “a few others” didn’t give a time frame.
“What I think the market was hoping for was that he would come down on one side or the other,” said Drew Matus, senior U.S. economist at UBS Securities LLC in Stamford, Connecticut, referring to Bernanke. “He decided to say we are not sure, and that just ratifies the minutes.”
Comments during the past week from some of the Fed’s regional bank presidents highlight the splintered opinion among policy makers.
San Francisco Fed President John C. Williams said in a speech yesterday the central bank will probably need to keep buying assets “well into” the second half of the year to combat unemployment that will decline only gradually. Narayana Kocherlakota, president of the Minneapolis Fed, said Jan. 11 that officials may not be doing enough to combat unemployment and that policy is “too tight, not too easy.”
Atlanta Fed President Dennis Lockhart said yesterday that while he has supported open-ended bond purchases so far, further expansion of a record stimulus could complicate the eventual shrinking of the balance sheet. “Open-ended does not mean without bound,” he said in a speech in Atlanta.
In their statement last month, the FOMC said it will keep rates near zero as long as the jobless rate is above 6.5 percent and inflation is forecast to be 2.5 percent or less. Previously they said they will keep interest rates low through at least mid-2015. Bernanke said the nation’s 7.8 percent unemployment rate in December “is not an acceptable situation” especially when 40 percent of the jobless haven’t worked for six months or more.
There are “too many people whose skills and talents are being wasted,” he said. “We’ll be assessing the impact of our actions on financial market conditions and looking to see how those link up to developments in labor markets and in the broader economy.”
Bernanke at a Dec. 12 press conference linked the bond purchases to “substantial” improvement in labor market conditions. The Fed’s balance sheet totaled $2.93 trillion last week.
“They are giving more scrutiny because they’re swimming in uncharted waters and the more they buy obviously they are more worried about the costs,” said Yelena Shulyatyeva, a U.S. economist at BNP Paribas SA in New York.
Bernanke told his audience in Ann Arbor that he is “cautiously optimistic” about the economic outlook for the next couple of years, while noting that inflation is below the Fed’s 2 percent target and unemployment is too high.
The Fed estimated in December that labor supply and demand would be in balance -- and the economy expanding at an optimal rate with low inflation -- with an unemployment rate of 5.2 percent to 6 percent.
The personal consumption expenditures price index rose 1.4 percent for the 12 months ending November, below the Fed’s 2 percent goal.
“That does make the case for being aggressive, which we are trying to do,” Bernanke said. Because the Fed is in the world of non-standard policies, “we have to pay very close attention to the costs and the risks and the efficacy,” as well as to “the potential economic benefits.”
Bernanke “still seemed pretty content that the costs are minimal but at the same time maybe giving it a little more space to be discussed,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.
The Fed chairman called on Congress to authorize an increase in the debt ceiling “so that we can pay our debts.”
The U.S. reached the statutory debt limit of $16.4 trillion on Dec. 31, and the Treasury Department began using extraordinary measures to finance the government. Treasury Secretary Timothy F. Geithner said yesterday the U.S. would exhaust that avenue as early as Feb. 15.
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