What Fed Members Said About QE and What Does it Mean?

In May, Fed members expressed a range of views on the asset purchases program. Philadelphia Fed President Charles Plosser called for shrinking purchases at the Fed’s next meeting; San Francisco’s John Williams favored a reduction perhaps as early as this summer but did not exclude the possibility of increasing pace of QE purchases following any tapering. By contrast, Boston’s Eric Rosengren said low inflation and high unemployment suggest there may be a need for even more stimulus, not less. Finally, Fed Chairman Bernanke has made it clear that it is prepared to either increase or reduce the pace of asset purchases depending on economic conditions.


Here are the main abstracts of Fed members’ speech and we can distinguish those which support a continuation of the asset purchases programm and those which are cons:


I/ Pros


On May 23 – Fed’s Williams (dove, FOMC non-voter): Reiterates more signs of improvement are needed before purchases can be slowed.
- Could increase pace of QE purchases following any tapering, will not be on auto pilot after tapering has begun.


On May 23 – Fed’s Bullard (moderate, FOMC voter): Bond buying should respond to economic data – comments from London.
- QE still most effective easing tool when rates are near zero.
- Unconventional measures should keep inflation expectations near target.


On May 22 – Fed Chairman Bernanke (dove, FOMC voter): FOMC has made it clear that it is prepared to either increase or reduce the pace of asset purchases depending on economic conditions – Congressional testimony on Economic Outlook
- Says a premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further.
- High rates of unemployment and underemployment are extraordinarily costly.
- Fiscal policy continues to exert a substantial drag on the US economy. Monetary policy cannot offset the drag on the economy from fiscal policy.
- Fed policy has helped to offset deflationary pressures and kept inflation from falling even further under the 2% target.
- Longer-term inflation expectations are still stable, inflation to be at or below 2% for the next few years.
- Loose monetary policy is providing significant benefits.


On May 22 – Fed’s Dudley (dove, FOMC voter): policy makers will know in three to four months whether the economy is healthy enough to overcome federal budget cuts and allow the central bank to begin reducing record stimulus – comments to Bloomberg TV.
- Says QE tapering possible by Autumn if economy improves
- Says Fed hasn’t decided yet on tapering timing, steps
- Says Fed wants to make sure markets do not overreact to tapering


On May 21 – Fed’s Bullard (moderate, FOMC voter): Inflation is low, cannot see a good case for tapering the bond purchases until low inflation is corrected – comments to reporters
- Adjustable bond buying is the best fit for QE, especially with rates near zero.
- No need to reduce volume of bond buying in the near term.

On May 21 – Fed’s Dudley (dove, FOMC voter): Current Fed exit strategy is stale and requires revision, too soon to say when the Fed will adjust the pace of bond buying.
- Fed must be willing to fight any threat of deflation, considerable weight needs to be put on risk of deflation.
- Expects to see enough labor market improvement to justify lower asset purchases, but final decision will be based on how well the economy deals with its fiscal drag.
- Market could over-react to first adjustment in the pace of asset purchases.
- Fed might not sell off MBS when it reduces its balance sheet in the future. May hold assets to maturity.

On May 20 – Fed’s Evans (dove, FOMC voter): Fed could continue buying bonds at the current rate through the fall or it could abruptly end the buying program if the labor market improvement looks to continue.
- Would be open-minded about discussing possible adjustments to the pace of bond buying at the next several FOMC meetings.
- It is still too early to get overly uncomfortable about inflation that is too low, however a few more months of low inflation might be different.
- Monthly payroll gains of 200K+ are still the criterion for an improved labor market.
- Sympathetic to Kocherlakota’s argument that the Fed has not provided enough accommodation, but not clear if Fed should consider the idea of adjusting its thresholds.
- Fed policies have been working, need a little bit more time to determine whether the labor market has improved substantially.

On May 17 – Fed’s Kocherlakota (dove, FOMC alternate): maintained Friday his support for the Fed’s aggressive measures to spur faster economic growth.
- warns that the costs of tightening monetary policy now would significantly outweigh any benefits for financial stability.
- Says Fed has not lowered real interest rates enough, tighter monetary policy would not benefit financial stability
- This has led him to the conclusion that “financial stability considerations provide little support for reducing accommodation at this time.”

On May 16 – Fed’s Rosengren (dove, FOMC voter): Highly accommodative monetary policies are appropriate; low inflation boosts risk of a negative shock that could undermine stable inflation expectations.
- Highly accommodative policies are still needed despite the stronger economy and improvements in the labor market.
- Improvements in the economy and labor markets are due in part to accommodative monetary policy.
- There is a case to be made for even more aggressive monetary policies.

II/ Cons


On May 22 – Fed’s Fisher (hawk, non-voter on FOMC): Inflation is not an issue at the moment; accommodative policy right now is pointless given current fiscal policy.
- Fed could reduce the rate of MBS purchases under QE.
- Not alone in thinking that housing has improved enough to scale back bond purchases.
- Fed has ample scope to reduce asset purchases and slow pace of MBS purchases.


On May 20 – Fed’s Fisher (hawk, FOMC non-voter): Unclear whether bond buying has worked for the US economy.
- Would have started tapering last week.
- Would like to see a scaling back of MBS purchases when it is time, not a full stop as that would be too violent for the markets.


On May 16 – Fed’s Fisher (hawk, FOMC non-voter): Fed should reduce MBS purchases and end them by year end – comments from NABE Industry Conference in Houston.
- Sees MBS purchases as potentially disruptive.
- Economy appears to be strong enough to encourage job growth in the near term.

On May 16 – Fed’s Williams (dove, FOMC non-voter): reiterates Fed may be able to taper bond buying as early as this summer.
- Job market has improved a great deal since the Fed initiated QE3, all signs point toward further progress with jobs.
- If everything goes as hoped, Fed could end asset purchases by sometime in late 2013.


On May 14 – Fed’s Plosser (hawk, FOMC non-voter): Reiterates would be in favor of reducing QE; Fed should taper QE as soon as June 18-19th meeting- comments from Stockholm.
- Slowing inflation is not a concern for policy; sees level as moderate in near-term


III/ My view

Before these speech, my first guess was that Fed could start tapering its bond-buying program in September, nevertheless, since almost all FOMC voters seem ready to extend it until economic conditions improve substantially, I believe that December is more likely because:


1/ Currently, the US recovery is still modest and vulnerable to global environment especially China and Eurozone,

2/ US fiscal policy should be a drag at least until Q3 2013.

3/ The debt ceiling problem is not addressed by politics and could also affect negatively consumer and companies’ confidence in Q3 2013.

4/ Employment is still high at 7.5% and has decreased mainly because of a drop of participation rate and not a real improvement on the labor market.

5/ In April, inflation was at the lowest since November 2010 at 1.1% YoY and should remain contained in the medium term.