Rosengren Says Fed's QE Improves Fiscal Outlook

Federal Reserve Bank of Boston President Eric Rosengren said the Fed’s large-scale asset purchases help the nation’s fiscal outlook, which should be reflected in an analysis of remittances to the U.S. Treasury.

“The LSAP program improves the broader fiscal outlook by lowering interest rates and providing more economic growth,” while also helping the Fed promote full employment and hit its 2 percent inflation target, Rosengren said in New York. “We do well to also consider these benefits, and the costs of inaction, when evaluating policy.”

Rosengren spoke in response to a paper by four economists, including former Fed governor Frederic Mishkin, warning that the Fed could lose control of monetary policy because of potential losses from its more-than-$3 trillion balance sheet. The paper is being presented today at the U.S. Monetary Policy Forum in New York.

The paper “highlights a potential problem -- that if monetary policy is successful in returning us quickly to full employment, or if interest rates rise for other reasons such as reaching a tipping point, remittances to the Treasury would be impacted,” Rosengren said in the text of his remarks. “Unfortunately, this discussion does not do justice to the policy trade-offs.”

The Fed is currently purchasing $85 billion of Treasuries and mortgage-backed securities a month to try to bring down joblessness of 7.9 percent. It previously bought $2.3 trillion of assets in two earlier quantitative-easing programs. The economists wrote that the Fed could face substantial losses concurrent with high U.S. deficits and a failure by Congress and the White House to put fiscal policy on a sustainable path.

Taxpayer Money

The Fed recently released a paper showing that the income it has traditionally earned from its policies could disappear for years as interest rates rise. After paying its expenses, the central bank returns any surplus to the Treasury to help fund the expenses of the U.S. government. In 2012, the Fed returned $88.9 billion to taxpayers.

A model used by the Boston Fed estimates that an additional $750 billion in asset purchases would reduce long-term interest rates by 0.2 percentage point to 0.25 percentage point, resulting in a $260 billion gain to economic output, Rosengren said. The model also estimates the stimulus would lower the jobless rate, he said.

Fed bond buying reduces interest rates and thus the cost of financing fiscal deficits, Rosengren said. Without the stimulus, the central bank would also be further from attaining its goals of full employment and price stability, he said.

Growth Path

“If an extended period of high unemployment causes more workers to drop out of the labor force and places many new workers on a permanently lower income growth path -- as many studies have shown -- then failing to undertake LSAPs can have much broader impacts on fiscal and economic policies,” Rosengren said.

The U.S. Monetary Policy Forum is sponsored by the Initiative on Global Markets at the University of Chicago Booth School of Business.

In addition to Mishkin, now an economist at Columbia University, the authors of the paper are David Greenlaw, chief U.S. fixed income economist for Morgan Stanley; James D. Hamilton, a professor of economics at the University of California in San Diego; and Peter Hooper, chief economist at Deutsche Bank Securities Inc.

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