September 19, 2017

Diverging Debate at Fed on When to End Stimulus

Mr. Bernanke has begun to prepare the way for the Fed to scale back on its effort to cut borrowing costs for businesses and consumers through the monthly purchase of vast quantities of Treasuries and mortgage-backed securities. Although a growing number of Fed officials want the bond buying to end more quickly, Mr. Bernanke sought on Wednesday to emphasize that an end to bond buying would not signal a broader change in the Fed’s commitment to support economic expansion and reduce unemployment.

“The overall message is accommodation,” Mr. Bernanke told a gathering of economists in Cambridge, Mass. “There is some prospective, gradual and possible change in the mix of instruments, but that shouldn’t be confused with the overall thrust of policy.”

The Fed has said that it plans to hold short-term interest rates near zero at least as long as the unemployment rate remains above 6.5 percent. Mr. Bernanke echoed recent remarks by other Fed officials in suggesting that the Fed was likely to maintain its suppression of short-term interest rates for some time after unemployment dropped below that threshold, and that officials were considering lowering the threshold.

Mr. Bernanke and other Fed officials have not fully explained this emerging shift in their strategy, in part because they do not seem to agree. Some officials say that asset purchases have been effective but are no longer necessary. Other officials say the purchases have failed to meet expectations. Still others say they are worried that the purchases could destabilize financial markets.

The Fed began last September to expand its holdings of Treasuries and mortgage bonds by $85 billion a month, the third major expansion of its investment holdings since the financial crisis. It now owns more than $3 trillion in bonds.

Mr. Bernanke said last month, after the most recent meeting of the Fed’s policy-making committee, that the central bank planned to gradually taper its monthly bond purchases starting later this year and ending in the middle of next year, so long as economic growth continues.

But “about half” of the 19 officials who participated in the policy meeting said in an internal survey beforehand “that it likely would be appropriate to end asset purchases late this year,” according to an account of the meeting that the Fed released Wednesday after a standard delay.

The account does not imply an earlier endpoint to the bond-buying program. Only 12 of the 19 officials vote each year, and proponents of a later end date still command a majority of the votes. Moreover, officials have said repeatedly that the timing will depend on economic conditions, in particular on evidence that the labor market outlook has improved substantially.

That is a standard the economy has yet to meet, at least to the satisfaction of the majority that backs the bond-buying program, known as quantitative easing. The account underscored that a decision to decelerate later this year still hangs in the balance.

“Many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases,” the account said. “Some added that they would, as well, need to see more evidence that the projected acceleration in economic activity would occur, before reducing the pace of asset purchases.”

Mr. Bernanke’s earlier announcement that the Fed intended to dial back the pace of its purchases later this year unsettled investors who have staked vast sums on the Fed’s plans. Longer-term borrowing costs rose, in part because of the assertion that the economy was doing better and in part because of the suggestion that the central bank intended to provide less help than investors had expected.

The average rate on a 30-year home mortgage has increased from 3.35 percent in early May to 4.29 percent last week, according to Freddie Mac, causing refinancing to diminish and raising questions about whether higher rates might soon start affecting home buying.

A flurry of follow-up speeches by Fed officials helped to stabilize markets, but did not reverse the initial rise in interest rates.

Article source: http://www.nytimes.com/2013/07/11/business/economy/rising-chorus-at-the-fed-to-end-stimulus-sooner.html?partner=rss&emc=rss