A range of views: Where Fed officials stand on numerical policy thresholds, asset purchases

December 3, 2012

U.S. Federal Reserve policymakers are mulling whether to expand the central bank’s current asset buys, and whether to tweak their communications by adopting numerical thresholds for inflation and joblessness to signal when rates might rise.

Since September the Fed has been buying a total of $85 billion in long-term securities each month to help push down borrowing costs. Part of that is a program known as Operation Twist, in which the Fed buys $45 billion in longer-term Treasuries and sells the same amount of shorter-term ones.

Twist expires at year end and officials will need to decide at their December 11-12 meeting whether to ramp up their separate quantitative easing program, dubbed QE3, to make up for the shortfall. Under QE3, the Fed has said it would buy $40 billion in mortgage-backed securities per month until the outlook for the labor market improves substantially.

Fed policymakers do not face the same pressure to make a decision about communications, and many economists expect no change this year. Since August 2011, the Fed has provided a calendar date to give markets a sense of how long they will likely hold interest rates near zero. However, some officials would prefer to use specific levels for joblessness and inflation as guideposts.

Below is a look at where top Fed officials stand on further asset purchases and the idea of adopting thresholds.


– Chicago Fed President Charles Evans (2013 voter) wants the Fed to promise low rates until unemployment hits 6.5 percent, as long as the outlook for inflation over the next two to three years does not rise above 2.5 percent. To attain those goals, he has said he supports keeping total asset purchases at $85 billion into 2013, and does not expect to see enough improvement in the labor market to warrant ending QE3 until the end of 2013.

— Boston Fed President Eric Rosengren (2013 voter) supports buying assets until the unemployment rate falls below 7.25 percent, and keeping interest rates low until it falls to 6.5 percent, as long as inflationary pressures remain muted.

— Minneapolis Fed President Narayana Kocherlakota (2014 voter) supports keeping interest rates low until the jobless rate reaches 5.5 percent or even below, as long as inflation does not threaten to rise above 2.25 percent.


– Fed Chairman Ben Bernanke (permanent voter) has suggested he would be open to both ideas, but has not publicly pushed for either.

“We will continue to do our best to add monetary-policy support to the recovery,” he said on November 20. “What the Federal Reserve can do and will do, is continue its stated policy which is do additional asset purchases, buy MBS (mortgage-backed securities) and take whatever actions are appropriate to try to ensure that the outlook for labor markets improves in a sustained way and a substantial way,” he said when asked about the possibility of a tightening of U.S. fiscal policy.

On the same day, he said the Fed was looking at thresholds “very carefully. … It does have the advantage that it would help to distinguish between our anticipation for how the economy is going to evolve, and how we will react to those conditions.”

– Fed Vice Chair Janet Yellen (permanent voter) has said she is “strongly supportive” of thresholds and supports continued asset purchases until the labor market improves.

– New York Fed President William Dudley (permanent voter)said on November 29 the labor market picture had not materially changed, suggesting he would support expanding into Treasury purchases in 2013.

– San Francisco Fed President John Williams (2012 voter) has said he would like to tie policy to thresholds, if it can be done without confusing the public about the Fed’s intentions. But he believes that finding a way to do so will be difficult and time-consuming, and the Fed’s calendar-date guidance has been quite effective. Williams says the Fed should continue to buy Treasuries even after Twist expires and will likely need to keep buying assets until late 2013.

– Atlanta Fed President Dennis Lockhart (2012 voter) said on Nov 16 that “continued aggressive use of balance sheet monetary tools will be appropriate and justified by economic conditions for some time, even if fiscal cliff issues are properly addressed.”


– St. Louis Fed President James Bullard (2013 voter), a critic of tying the Fed’s low-rate policy to a date in the future, is also skeptical of threshold-based policy, saying it could put the committee “in more of a box.” But he suggested on November 8 that he is open to buying Treasuries to make up for the expiration of Twist. “One of the advantages of the approach that we took with QE3 is that it is an adjustable amount and so we could adjust that in order to make up for any perceived tightening from the ending of the Twist program,” he said.


– Richmond Fed President Jeffrey Lacker (2012 voter) opposes thresholds but says the Fed could provide some guidance on the economic conditions that could spur a rate hike.

– Philadelphia Fed President Charles Plosser (2014 voter) said he is “dubious” about the benefits of replacing Twist with outright purchases of Treasuries. On November 15 he said thresholds for inflation and unemployment could cause confusion, but he favored a “systematic approach” to policy – where the Fed outlines how it would respond to various economic developments, and then follows through – to replace the Fed’s calendar-date guidance on low rates.

– Dallas Fed President Richard Fisher (2014 voter) opposes extending Twist, has called for limits on asset purchases and has called thresholds a “bad idea” because the Fed cannot directly influence the unemployment rate.


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