Top takeaways from Boston Fed President Eric Rosengren’s April 19 talk
Discussed central bank asset purchases and balance sheets
Boston Fed President Eric Rosengren spoke at the Levy Economics Institute at Bard College’s 26th Annual Hyman P. Minsky Conference on April 19. The top takeaways from his talk are below, and the full text and charts are available here.
Quite likely that use of central bank balance sheets will be necessary in future downturns
On Wednesday, Boston Fed President Eric Rosengren said that structural changes in the macroeconomy “may necessitate more frequent use of large-scale asset purchases during recessions.”
He called it “quite likely” that the use of central bank balance sheets will be necessary in future economic downturns.
Various factors mean low equilibrium rates, and reductions encountering the zero boundary
A combination of low inflation, low rates of productivity growth, and slow population growth may imply an economy “where equilibrium short-term interest rates remain relatively low” by historical standards.
As a result, reductions in short-term rates to combat recessions will encounter the zero boundary and “will not be sufficient,” Rosengren said – so “it is likely to be more common for central banks to engage in asset purchases to stimulate the economy by reducing longer-term rates.”
“So balance-sheet expansions – and exits – are likely to become more standard monetary policy tools around the world.”
Ideal policy would take a very gradual approach to balance sheet reduction and reinforce primacy of interest rate policy
Rosengren said that while the FOMC is still carefully considering its balance sheet exit strategy, his ideal policy “would take a very gradual approach to balance sheet reduction.”
Rosengren noted that the Federal Reserve should adopt balance sheet exit strategies “that reinforce the primacy of interest rate policy.”
“In my view that process could begin relatively soon, and should not significantly alter the FOMC’s continuing gradual normalization of short-term interest rates,” he said.
Rosengren added that by initially retiring only a small percentage of maturing securities, and then very gradually shrinking the volume of the securities being reinvested, “the tightening of short-term interest rates should not need to be much different than it would be in the absence of shrinking the balance sheet.”
“Starting to shrink the balance sheet earlier – and doing so in a very gradual fashion – implies very little reduction in the degree of monetary stimulus coming from the U.S. central bank’s balance sheet,” Rosengren said.
“This, in turn, will allow policymakers to focus on gradual increases in the federal funds rate target as the primary mechanism for normalizing monetary policy and calibrating the economy.”