Bernanke Options to Boost Growth Include Open-Ended QE
Federal Reserve Chairman Ben S. Bernanke, who last month defended his unorthodox monetary policies, has a new tool at hand should he seek one to a revive a flagging economy and labor market: open-ended bond buying.
Barclays Plc forecasts the Federal Open Market Committee this week will announce monthly purchases of $50 billion to cut the jobless rate while holding inflation at 2 percent. Economists at Goldman Sachs Group Inc. (GS) and BNP Paribas, responding to last week’s report of slowing job growth, also say they expect an announcement of an open-ended plan on Sept. 13 after a two-day FOMC meeting.
The Fed’s practice of specifying an amount and an end-date for purchases has resulted in abrupt withdrawals of stimulus that later was renewed after the central bank failed to reach its goals. By contrast, an open-ended program would tie purchases to a sustained improvement in the economy, said Michael Gapen, senior U.S. economist at Barclays and a former member of the Fed Board’s Division of Monetary Affairs.
“As a Fed chairman, 2 percent growth isn’t doing it for you, 8 percent unemployment isn’t doing it for you -- they need a faster acceleration,” said Gapen, who is based in New York. “So, the decision is, ‘OK, let’s hit the pedal.”’
Three Fed presidents have voiced support for an open-ended approach: San Francisco’s John Williams, Boston’s Eric Rosengren and Chicago’s Charles Evans. James Bullard of St. Louis said that while he backs the strategy, he wants to see more economic data before taking action.
Treasuries, gold and stocks rose on Sept. 7 after a Labor Department report showing payrolls rose less than forecast as investors increased bets the Fed will expand record stimulus at its meeting this week.
Employers added 96,000 jobs in August, down from a 141,000 increase in July. Average hourly earnings were little changed, and the unemployment rate unexpectedly declined to 8.1 percent from 8.3 percent as 368,000 Americans left the labor force.
Bernanke, in an Aug. 31 speech in Jackson Hole, Wyoming, said additional bond purchases were an option to spur growth as he made the case for further stimulus. He didn’t specify the duration or amount of any new program.
In the first round of so-called quantitative easing, the Fed in March 2009 began purchasing $1.25 trillion of mortgage- backed securities, $175 billion of agency debt and $300 billion of Treasuries to provide further stimulus after the benchmark rate was cut to zero in December 2008.
In the second round, announced in November 2010 and lasting through the following June, the Fed bought $600 billion of Treasuries. Last September, the Fed announced its Operation Twist program to replace $400 billion of debt in its portfolio with longer-term securities through June 2012. That was later extended to the end of this year.
With open-ended buying, the central bank would “adjust this program as time goes on, either to increase it or decrease it, end it sooner or later, depending on how economic conditions develop,” the San Francisco Fed’s Williams said in an Aug. 31 interview at a Fed symposium at Jackson Hole.
He said the central bank could conduct “a flow of purchases” of both mortgage-backed securities and longer-term Treasuries.
“It makes more sense to be more focused on the economic conditions and where you are relative to your mandate,” Jan Hatzius, chief economist at Goldman Sachs in New York, said in an interview last week. His firm expects monthly purchases of around $50 billion consisting mainly of agency mortgage-backed securities and potentially including Treasury securities.
Fed spokeswoman Michelle Smith declined to comment.
Concerns among some Fed officials that more quantitative easing might not be effective or kindle inflation “would be mitigated under a program linked to actual inflation and actual measures of economic activity,” said Karen Dynan, vice president for economic studies at the Brookings Institution in Washington.
“While it all sounds easy and good in principle, there are some big practical challenges,” said Dynan, a former senior adviser at the Fed board. “What exact measures of inflation and economic activity are they targeting and what levels of these variables should the program be targeting? For employment, especially, it seems like there could be a lot of debate.”
Fed officials in June forecast that by late 2014 the jobless rate would still be above their full-employment estimate of 5.2 percent to 6 percent, with inflation not rising above their goal of 2 percent. Inflation slowed to 1.3 percent for the 12 months ending July.
U.S. central bankers plan to publish a new set of forecasts extending to 2015 at the conclusion of their meeting this week.
Fed officials may have modified their view of how quantitative easing fuels growth, said Julia Coronado, chief economist for North America at BNP Paribas in New York.
They’ve previously said buying bonds and reducing the supply of long-term assets helped bring down interest rates on corporate debt and other fixed-income securities, Coronado said.
Now, they also see that a sustained commitment to improved economic performance is critical to “mitigating uncertainty,” she said. She expects an FOMC announcement of an open-ended purchase plan on Sept. 13 divided between housing debt and Treasuries.
The Fed may commit to $600 billion in purchases over nine months and say they’ll extend the program or scale it back depending on the strength of the expansion, she said.
Under such a plan, “financial markets will have greater certainty that the Fed will be there” until conditions improve, she said.
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