Derby's Take: Firm Measurements of Fed's Bond Buying Success Prove Elusive
May 07 2021 - 5:59AM
Dow Jones News
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 michael.derby@wsj.com
(END) Dow Jones Newswires
May 07, 2021 05:44 ET (09:44 GMT)
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