The Federal Reserve has been debating how best to wind down its $US4.5 trillion balance sheet, but that doesn’t mean policymakers are retiring the controversial recession-era policy tool, known as quantitative easing or QE.
Two top Fed officials, speaking at a Hoover Institution conference panel, argued that because estimates for the “neutral” interest rate are now around 3%, the central bank is likely to need to bring rates down to zero more frequently than in the past.
This means the Fed will find itself reaching for other policy tools to add stimulus to growth and employment, namely large-scale purchases of government bonds like the ones undertaken during and after the financial crisis.
“I think it is inevitable that we’re going to be talking about the balance sheet expanding during recessions,” said Eric Rosengren, president of the Boston Fed.
St. Louis Fed President James Bullard offered a similar view, saying there was a “distinct possibility” the Fed would again have to resort to quantitative easing or QE when the economy hits its next downturn.
The officials were responding to questions about the efficacy of bond buys and their pitfalls, including increased political scrutiny on the central bank.
The central bankers, including Chicago Fed President Charles Evans, pushed back against the notion that QE’s impact had been minor. They pointed to sharp moves in asset prices, including not only stocks but also Treasury bonds, as indicating a significant impact.
In addition, Evans argued that unemployment during the recession, while it peaked at 10% in 2009 but has since fallen to 4.4%, would have been much worse without the Fed’s interventions given where conditions stood during the worst slump since the Great Depression.
Evans said making sure the central bank actually meets its 2% inflation target, which it has undershot for most of the economic recovery, is another way to ensure the Fed can avoid needing to push official borrowing costs to zero again.
“The problem of the zero lower bound is very real,” he said. “We know what to do when inflation gets to high.”