A nice series of articles from Bloomberg news alerts us to the fact that the Fed is anything but united when it comes to QE. There is consequently ongoing confusion, disagreement and general apprehension surrounding whether and how the Fed is supposed to end QE . Quite simply; the powers that be do not see eye to eye on this one and this is slightly worrying (if completely understandable).
In the first article, Federal Reserve Bank of Boston President Eric Rosengren warns about removing stimulus too quickly in light of the still elevated unemployment rate and low inflation.
“With the inflation rate below target and the unemployment rate significantly above target, we believe strongly that monetary policy makers have the opportunity to be patient in removing accommodation,” Rosengren said today on a panel discussion at the American Economic Association’s annual meeting in Philadelphia. “This was one of the motivations for my dissenting vote.”
This a point that make imminently sense of course in the context of a standard Taylor Rule for monetary policy coupled with a dollop, perhaps, of optimal control and nominal GDP targeting. Yet, in another article, Federal Reserve Bank of Philadelphia President Charles Plosser is quoted of the opposite point suggesting, as it were, that large scale QE programmes may do more harm than good.
Federal Reserve Bank of Philadelphia President Charles Plosser, an opponent of bond purchases by the Fed, said policy makers shouldn’t try to make up for a permanent loss in potential growth caused by the financial crisis. “Efforts to use monetary policy to offset such permanent shocks and to close what appears to be a gap will likely be ineffective and perhaps even counterproductive,” Plosser said today in a speech in Philadelphia.
This is a sentiment shared by President of the Federal Reserve Bank of Dallas Richard Fischer. We highly recommend this interview with Fischer by Russ Roberts from EconTalk. Skip the first part if you are not interested and focus on the last bit where Fischer presents his views on QE.
It is safe to say that the next 6-12 months will see a growing debate within the Fed surrounding the scope, effect and future course of unconventional monetary policy. Economic data will dictate a lot to be sure, but if the argument that QE may be fundamentally inefficient in dealing with the problems the US economy faces gathers wind, the discussion could potentially become much more heated and fundamental. Indeed, if the efficacy of QE itself is brought into question from within the Fed, Yellen et al could face a big challenge in appearing as one unified institution.
Still this seems to be where we are going. Recent comments from Federal Reserve Bank of New York President William C. Dudley questions whether the Fed understands how QE works at all!
“We don’t understand fully how large-scale asset purchase programs work to ease financial market conditions,” Dudley said today in a speech in Philadelphia. “Is it the effect of the purchases on the portfolios of private investors, or alternatively is the major channel one of signaling?”
We admire the intellectual honesty here and much prefer that to the intellectual hubris that so often infects people with important public offices. Still, the fact that this discussion is emerging now at the beginning of the exit is odd. Shouldn’t we have had the debate before launching open-ended QE? Defenders of the Fed would point out here that one should never judge a military operation with hindsight and from the comfort of an armchair. The Fed did what it thought right at the time with the information and tools it had at its disposal. We agree. But the Fed now faces another challenge and potentially a much more difficult one. If tapering turns into a universal debunking of QE as a policy tool what does the Fed do next time the US faces a cyclical slowdown? The next recession in the US could be a very tricky one to navigate for the Fed if it happens at a time when nominal interest rates are still zero.
As we have argued, the attempt by the Fed to separate tapering from forward guidance will prove difficult. Talk, after all, is cheap. However, what now seems obvious is that it will also be increasingly difficult for the Fed to speak with one voice when it comes to QE, its merit and effectiveness as well as how and whether it should be unwound. Needless to say the interplay between communication and action is imperative for the Fed in the coming 6-12 months.