Better late than never. San Francisco Federal Reserve President John Williams continues to make the case for another round of quantitative easing in an interview with Robin Harding at the Financial Times. I came away from the article with five takeaways:
1.) There will be little progress in the labor market in the absence of additional policy. Not surprising, given that the Fed's forecasts were never exactly exciting to begin with, and the recent weakness in the data flow is leading economists to downgrade Q2 growth to the 1% range, putting even the Fed's anemic forecasts into jeopardy.
2.) Williams believes the Fed should shift the focus to mortgage backed securities:
“There’s a lot more you can buy without interfering with market function and you maybe get a little more bang for the buck,” he said.
He sees MBS as an avenue around the potentially disruptive effects of additional Treasury purchases, acknowledging one of the concerns about additional QE.
3.) Importantly, Williams realizes that the arbitrary end-dates for policy actions are disruptive and counterproductive. Instead, he argues for open-ended purchases:
“The main benefit from my point of view is it will get the markets to stop focusing on the terminal date [when a programme of purchases ends] and also focusing on, ‘Oh, are they going to do QE3?’” he said. Instead, markets would adjust their expectation of Fed purchases as economic conditions changed.
This is a big step, and, in my opinion, this is exactly where the Fed needs to go. Shift the focus from the policy itself to the macroeconomic outcomes the policy is trying to achieve. After two years of stop-start policy, Williams gets it.
4.) Eliminating interest on reserves is pretty much off the table. I never thought the Fed was too excited about the this option.
5.) Despite delivering a strong argument for QE, Williams himself is not convinced the FOMC will follow his lead:
But he declined to call directly for a Fed move. “I think the argument against further action is the question of uncertainty around the effects, the costs and the benefits of doing so,” he said.
This uncertainty was evident in the minutes of the last FOMC meeting, as well as Federal Reserve Chairman Ben Bernanke's trip to Capitol Hill last week. While I would like to think that his generally dour outlook was in and of itself a signal that he was prepared to ease further, he made clear that QE was not the only option on the table. As quoted by the FT:
“We haven’t really come to a specific choice at this point, but we are looking for ways to address the weakness in the economy should more action be needed to promote a sustained recovery in the labour market.”
This makes me think that there is not broad support at the FOMC for additional QE, or, what I increasingly think is likely, that Bernanke himself is sufficiently uncertain about the impact of additional QE that he would prefer to find another tool, perhaps with the idea of reserving QE for a more dire situation. If Bernanke wanted to push the FOMC in the direction of QE, he could have done it well before now. Thus, the fact that such internal uncertainty remains about what the Fed would do next reveals something about his preferences.
Bottom Line: Williams again telegraphs his belief that the Fed should engage in additional quantitative easing, and makes a big step in calling for an open-ended program. It is not, however, clear the Bernanke has come to the same conclusion. It's really Bernanke, not the Fed hawks, that has been the impediment to further easing.
Thanks to CR for spotting this article tonight.