By Michael S. Derby
Federal Reserve officials believe their $120 billion a month in asset buying is a critical part of their efforts to aid the U.S. economy, but when it comes to measuring the effect of the purchases, things turn slightly ephemeral.
The Fed has been buying $80 billion in Treasury bonds and $40 billion in mortgage bonds each month since last year and it isn't clear when that will stop. The central bank used the purchases to calm unsettled financial markets at the start of the pandemic. The purchases have, however, reverted to what they were during the financial crisis: a stimulus tool to complement the Fed's near-zero interest rate stance.
The Fed's asset buying is aimed at lowering long-term bond yields from where they otherwise would have been, which in turn makes overall financial conditions more supportive of growth. The challenge for Fed policy makers and others is a lack of clear understanding in what a given level of buying does to asset levels.
In an interview with The Wall Street Journal this week, Federal Reserve Bank of New York leader John Williams was asked if the central bank has any metrics that help it understand the impact from a given amount of purchases. Mr. Williams replied that the purchases "lower mortgage rates, the cost of borrowing for companies and households and everybody." That, he added, translates into a "greater willingness to spend and invest, especially in an economy that's moving forward."
In separate comments to reporters earlier in the week, Mr. Williams flagged the Fed's mortgage bond buying as an especially potent source of stimulus.
Chicago Fed leader Charles Evans said Wednesday that asset buying works in several different ways. But he said one of the key benefits is that it signals how committed the Fed is to helping the economy recover.
"By continuing to do asset purchases, we're demonstrating we're in it to win, we're going to keep going, and we're, by golly, going to be achieving our, in this case, 2% on average inflation objective," Mr. Evans said.
Separately, Cleveland Fed leader Loretta Mester said the current crisis is unique, which further complicates understanding the link between the Fed's bond buying and changes in financial conditions.
Fed bond buying is "part of a package of policy actions that have made policy very accommodative, which I think is appropriate," Ms. Mester said, adding that compared with past attempts to divine the impact of such purchases, "there's no reason to think that now is different from then."
During the financial crisis and its aftermath, academics and central bankers tried to find some link between asset buying and changes in yields and broader economic changes. A paper published last fall by the National Bureau of Economic Research argued that central bank officials have been overly confident about the impact, saying "while all of the central bank papers report a statistically significant [quantitative easing] effect on output, only half of the academic papers do."
The study's authors attributed the rosier central bank view to institutional incentives that drive central bankers to offer more optimistic views of their employers' work, incentives that don't exist for outside academics.
Understanding what the Fed gets for its bond buying is important because while it may help the economy in some hard-to-measure way, the purchases can also create problems, such as encouraging investors to seek better returns by moving money into riskier assets. The purchases also drive the Fed's balance sheet higher, which has at points courted political concerns.
Dallas Fed leader Robert Kaplan, who had a long career in finance before coming to the central bank, has been at the forefront of pushing his colleagues to consider paring back bond buying because of the faster-than-expected recovery.
"In light of some of the excesses and imbalances that can be created by these purchases, I think it's wise and I think we would be well served to be talking about this subject sooner rather than later, and I think we'll be much healthier as an economy when we are able to start weaning off these purchases," Mr. Kaplan said Thursday.
In a report Thursday, the Fed noted some of the vulnerabilities that can result from low Treasury yields. Prices of risky assets have generally increased since November as the economy has improved, the report said, adding that "High asset prices in part reflect the continued low level of Treasury yields." The report also said asset prices "may be vulnerable to significant declines should risk appetite fall."
Write to Michael S. Derby at firstname.lastname@example.org
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