Top takeaways from President Rosengren’s March 25 talk
Addresses misconceptions and realities of Fed’s balance sheet policies
Boston Fed President Eric Rosengren spoke yesterday in front of the Credit Suisse Asian Investment Conference in Hong Kong. Here are the top takeaways from his speech.
Disagrees that market turbulence in late 2018 was caused by balance sheet reduction
Rosengren said there seems to be little correlation between equity market movements and the ongoing and relatively small and steady decline in the Fed’s balance sheet – the assets it holds and the liabilities and capital used to finance them. Rosengren also rejected the idea that the current balance sheet reduction caused the market volatility at the end of last year.
He noted markets recovered in early 2019, despite little change in the magnitude of the balance sheet’s “still quite gradual” runoff. “In my view, concerns about the international economy, potential trade disputes, and a U.S. government shutdown are much more plausible explanations for the financial market turbulence,” Rosengren said.
Says the Fed’s balance sheet will not be able to return to pre-crisis size
Rosengren said, “it is unrealistic to expect the Fed’s balance sheet to return to the size it was before the financial crisis,” as some have suggested, because factors not related to monetary policy impact the balance sheet’s growth.
“Part of the expansion of the Federal Reserve’s balance sheet occurs as a normal consequence of a growing economy with a growing need for currency, a factor not related to monetary policy action,” he said. Simply put, “the change in currency holdings alone highlights that the Fed’s balance sheet will not be able to shrink to earlier levels.”
Emphasizes central banks may increasingly turn to the balance sheet as a tool to stimulate the economy
Rosengren said the Fed’s balance sheet may be needed as a stimulative tool in a hypothetical future recession, given today’s low-rate environment, in which there is limited room to reduce rates before they reach zero.
Rosengren called on policymakers to continue to study how balance sheet operations influence the economy. He added, “I dare say it is important for market observers, lawmakers, and the public to become more comfortable with the benefits of central banks using their balance sheet tools to pursue the public interest.”