MNI POLICY: Fed Rosengren: Little QE Room If 10Y Tsy Near Zero

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve's benchmark short-term rate and

10-year Treasury yields may get stuck near zero if the coronavirus triggers a

recession, forcing the central bank to consider buying assets that are now

excluded from its toolkit, Boston Fed President Eric Rosengren said Friday.

     Crisis-era QE might offer limited stimulus to the economy in a low-rate

environment, underscoring the paucity of tools available to the Fed in the face

of a large shock, he said. Negative interest rates also have limited power to

boost the economy, as evidenced by the experience abroad, he said. 

     The 10-year Treasury yield has fallen below 0.8% Friday from 1.8% on Jan.

21 when the first U.S. coronavirus cases were discovered. The Fed lowered the

target range for its fed funds rate by 50bps to 1% to 1.25% after an emergency

rate cut Tuesday. 

     "If the economic reaction to the coronavirus does result in the funds rate

falling to its effective lower bound, this heightened sensitivity of the 10-year

U.S. Treasury rate to adverse news raises the possibility that the 10-year U.S.

Treasury rate could follow close behind," Rosengren said in remarks prepared for

a financial market conference in New York. 

     "As a result, there would be little room for the Federal Reserve to lower

rates through large purchases of long-term Treasury securities -- like it did to

make conditions more accommodative in and after the Great Recession -- if a

recession occurred in this rate environment." 

     The following are other major points from Rosengren's prepared remarks at a

Shadow Open Market Committee meeting: 

     - The Fed could pursue a policy to purchase a "broader range of securities

or assets," Rosengren said, though the change would require revisions to the

Federal Reserve Act. If it did pursue such a policy, the Fed should also seek to

be indemnified by the U.S. Treasury against losses. 

     - Rosengren remains skeptical of negative interest rates, viewing the

adverse side effects as likely "quite large." Negative interest rates "poorly

position an economy to recover from a downturn," and other actions that have

helped support banks in Japan and Europe "might not be politically feasible in

the United States," he said. In addition, the global experience so far with

negative rates convinces Rosengren that the policy would not be successful in

stimulating economic activity. Firms don't respond very strongly, for one. 

     - Fiscal policy should step up in a low-rate environment. "Somewhat

surprisingly, there seems to be little movement toward making automatic

stabilizers more prominent, or preparing to invest significantly more in the

sorts of public investment projects that yield positive returns," he said. 

     - "As investors are more aware of the likelihood of short-term rates

hitting the zero lower bound, they have been more willing to use U.S. Treasury

bonds as hedges against recession risk."

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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