Fed officials point to fiscal benefits of bond buying
By Jonathan Spicer and Pedro da Costa | February 23, 2013 4:14 AM EST
Two top Federal Reserve officials expanded their defense of the U.S. central bank's asset-buying program, arguing on Friday that the policy helps the broader fiscal health of the United States.
Boston Fed President Eric Rosengren and Fed Governor Jerome Powell both pointed to higher tax revenues and increased output as two benefits the U.S. government enjoys from the central bank's policy of buying $85 billion in bonds per month.
A third central bank policymaker, James Bullard of the St. Louis Fed, said the purchases will continue for a long while despite increasing signs of concern among some of his colleagues about the potential costs and risk of doing so.
The Fed is buying $45 billion in Treasury bonds and $40 billion in mortgage-backed securities per month in an effort to encourage spending and investment, and to help along the slow and erratic U.S. recovery from the 2007-2009 recession.
Though the buying is meant to continue until the troubled U.S. labor market improves substantially, some Fed policymakers are growing concerned that the Fed's balance sheet, now at $3 trillion, risks destabilizing financial markets or sparking future inflation.
Meanwhile, financial markets are abuzz with speculation that the asset purchases will end sooner than previously thought after minutes of the Fed's January policy meeting, released on Wednesday, showed a number of officials think the buying might have to slow or stop before seeing the desired pickup in hiring.
In a speech, Rosengren redoubled his defense of the Fed's very accommodative monetary policy, which he, Bullard and Powell all backed in a vote last month.
The so-called quantitative easing program, known as QE3 because it's the third such effort by the central bank, reduces interest rates for the United States, and helps to lower the country's debt-to-GDP ratio, said Rosengren, a dovish Fed official.
Further, he argued, the faster economic growth brought about by QE3 has the effect of bringing in more tax revenue. It also reduces government spending in areas such as unemployment insurance because such programs reduce joblessness, he said.
"We do well to also consider these benefits, and the costs of inaction, when evaluating policy," Rosengren said at a conference hosted by the University of Chicago Booth School of Business.
In a familiar argument, Rosengren also said that U.S. unemployment would be higher than the current 7.9 percent rate, and inflation would be even weaker than it is, absent the purchases.
POTENTIAL BALANCE SHEET LOSSES
Among the concerns clouding QE3 is the prospect of balance-sheet losses down the road. The Fed has delivered profits on its bond holdings to the U.S. Treasury over the last few years, but it will likely deliver losses in the future, when interest rates on the securities begin to rise.
An internal Fed study recently found that the massive stable of assets could lead to up to four years of losses totaling anywhere from $10 billion to $120 billion depending on future interest rates and on how long QE3 continues.
But Powell downplayed the prospect of losses that the U.S. central bank will deliver, arguing that there are broader benefits from the Fed policy.
Powell acknowledged that the Fed could come under public and political criticism if there is an extended period of zero so-called remittances to the Treasury. But he said that, more importantly, the Fed has no intention to permit inflation in the face of such criticism.
"Any temporary losses should be weighed against the expected social benefits of the increased economic growth generated by the (bond buying), which would include higher tax revenue from increased output," Powell said at the conference.
Overall U.S. Gross Domestic Product (GDP) growth was just 2.2 percent in 2012, below the 3-percent pace to which the United States is accustomed. Economists expect the slump to be temporary, and the Fed predicts "moderate" GDP growth of 2.3 to 3.0 percent this year.
Bullard, considered an inflation hawk, has expressed caution about expanding the central bank's balance sheet too far. He has advocated scaling back the bond purchases as the labor market improves.
On Friday he acknowledged more voices within the Fed are pressing to scale back bond buying, in part because it could soon fuel inflation. "The idea of tapering the program at some point in the future may be gaining some steam on the committee," he said in an interview with CNBC television.
But, Bullard said, "Fed policy is very easy and it's going to stay easy for a long time."
(Additional reporting by Jason Lange in Washington; Editing by James Dalgleish)