MNI INTERVIEW: Fed's Rosengren Favors Longer QE Duration

Boston Federal Reserve President Eric Rosengren told MNI Tuesday he would prefer to see the Fed lengthen the average duration of its Treasuries purchases rather than increase buying, adding that more QE overall may be "advantageous" if longer rates rise amid a challenging next six months.

"The preferred step in my view would be to change the duration rather than increase how much we purchase," Rosengren said. "It could be done either by purchasing more at the long-end of what we are currently purchasing, or do something more like an 'Operation Twist,' where we are selling some of our short-term securities and buying some of our long-term securities."

The move up in rates along the yield curve this week with an announcement of a promising Covid-19 vaccine from Pfizer "certainly says if we do more QE, it is likely to have more of an impact than it might have had when yields were already quite low," Rosengren said.

"We need to balance where we think the economy is going to be and how effective the actions we'll take will be. With long term rates going up, it makes you think about whether -- if we do find a very weak couple of quarters -- whether additional purchases might be advantageous."

ECONOMY CHALLENGED

Rosengren, who isn't currently a voting member of the rate-setting Federal Open Market Committee, said the economy "has done pretty well up to this point" but "the fourth quarter and the first quarter are going to be quite challenged by how extensive the second wave of the virus becomes."

"Some states will have to put on additional restrictions, and even in those states without additional restrictions, many individuals will choose to shelter at home for fear of getting the virus," he said. "The next two quarters are going to be pretty challenging."

"Once we have widespread deployment of the vaccine, which looks like it's going to be surprisingly effective, the second half of the year [in 2021] should be much stronger -- as long as we keep a very accommodative monetary and fiscal policy, which is what I would anticipate," he said.

The Fed is expected to keep rates near zero for years and is currently buying USD80 billion in Treasuries and USD40 billion in MBS per month. Fed officials have called for renewed fiscal support from the federal government, but lawmakers so far haven't delivered another shot of stimulus.

Rosengren said he is a little more pessimistic than the median view in the Summary of Economic Projections released in September, and suggested that the announcement of a vaccine earlier this week could delay further fiscal stimulus in Washington, which looks set to come March at the earliest. "It's probably going to be more challenging to get as big a fiscal package through Congress and signed by the president," he said, noting the results of the elections and their impact on Congressional dynamics.

The Boston Fed leader also questioned whether it would be a good idea to end the central bank's emergency lending facilities, including the corporate bond purchase program, the Municipal Liquidity Facility, and the Main Street Lending facility, at the end of the year. The fate of those programs will be decided by the Fed Board of Governors and the Treasury Department in Washington and have been part of a political battle.

"We should ask ourselves whether, in the worst part of the pandemic and at the end of the year when markets tend to be very volatile, is that the ideal time to end this program?" Rosengren said.

TREASURIES MARKET

The Boston Fed leader also called for an "overhaul" of the U.S. Treasuries market infrastructure. "We need to take a very close look at the institutional way that large volumes of transactions get done at critical times in the cycle," he said, adding that the Financial Stability Board is closely examining the events in March and wouldn't want to get ahead of them.

Central clearing would be among the options to "strongly consider," Rosengren said, along the lines of a proposal offered by Stanford professor Darrell Duffie.