MNI: Fed Framework Review To Hone QE Objectives - Ex-Officials
MNI (WASHINGTON) - The Federal Reserve is likely to consider using its framework review next year to provide more clarity on its objectives for carrying out bond purchases via quantitative easing, which at times have been used to support market functioning and at times to provide stimulus, former Fed officials and staff told MNI.
The lessons of the past few years show the central bank needs to better communicate its intentions when using QE, the ex-officials said, noting that it remains a viable policy tool with the neutral rate of interest still at low levels.
"You may need to do asset purchases in the future, in circumstances where you need more accommodation and you’re at the effective lower bound. You need to keep this tool in place, but the best way to keep it in place is to make sure if you increase the balance sheet you reduce it again – that it doesn’t go up in an unending fashion," former Chicago Fed President Charles Evans told MNI.
"Round tripping the balance sheet is an important part of the strategy. It might be useful to have some concept of that in the framework statement.”
INTENT
The Fed began buying Treasuries and agency mortgage bonds at the start of the pandemic in early 2020, saying it intended to support liquidity and market functioning. By June, with its benchmark interest rate near zero, it was purchasing USD120 billion a month and pledged in December to continue at that pace "until substantial further progress has been made toward its maximum employment and price stability goals.”
Many view the QE program as having slowed the Fed's response to soaring inflation — by the time the FOMC was ready to raise interest rates, it still needed to wind down its purchases. When the Fed finally ended QE in March 2022, its balance sheet had ballooned by USD4.6 trillion.
William English, former director of the division of monetary affairs at the Fed’s board of governors, said the central bank ought to be clearer about its intentions when carrying out asset purchases, though he added that that may not come in its framework statement. (See MNI: Fed To Examine If Framework Robust To Any Scenario)
"They basically began purchasing because of financial market functioning. Then they were never quite clear as it continued and they transitioned to a program to stimulate growth by the end of the year, but they were never very clear about that transition and that was a problem," said English, favoring the Bank of Canada's explanation in October, 2020, when it said it would continue QE until recovery was well underway.
TOOLS
The Fed's 2012 framework statement didn't discuss asset purchases but noted "monetary policy actions," largely seen to mean the funds rate. The 2020 framework statement said the central bank is prepared to use its "full range of tools" to achieve its maximum employment and price stability goals.
"It does make sense to have some discussion of QE," said Jonathan Wright, a former member of the Fed Board's division of monetary affairs. He emphasized the difficulty of getting the entire committee to agree to changes, and suggested the central bank could instead provide more clarity each time it ramps up bond buying.
"It's just going to be a little bit difficult to write a statement of objectives that is going to be usable in all circumstances," he said about the review. "You want to write them for things that are coming down the road that you don't anticipate."