Eric Rosengren, President of the Federal Reserve Bank of Boston has spoken on Monday defending the latest Fed efforts around asset purchases. He maintains that the Fed does have the tools to counter a rise in inflation. His speech was titled ““The Spread between Primary and Secondary Mortgage Rates: Recent Trends and Prospects” and was in New York.
Rosengren showed just how much the asset size has changed on the Fed’s balance sheet: from under $1 trillion at the end of 2007 to close to $3 trillion in 2012. The composition of the assets has also changed: at the end of 2007, nearly two-thirds of the assets were shorter-term assets maturing in 5 years or less in Treasury securities and almost one-half of the securities had a maturity of less than one year. As of now after Operation Twist, the balance sheet has become more heavily weighted toward long-duration Treasury securities and also includes approximately $880 billion in mortgage-backed securities maturing in more than 10 years.
Another issue of importance is inflation. Rosengren said that a rapid increase in excess reserves in both the United States and Japan appear to have had little effect on inflation in both countries. He also noted that an increase in bank reserves has not caused a large increase in bank lending.
One of the main goals was lowering the cost of funding, i.e. lower rates. One issue brought up here was that the purchases of long-term Treasury securities flatten the yield curve and cause other medium-term and long-term rates to decline (including autos and houses).
Some Fed presidents have been against the persistent buying of these assets and expanding the balance sheet. Rosengren is merely defending the endless easing efforts made to date. As far as what lies ahead for monetary policy, he concluded, “we can achieve an even better appreciation for additional steps that could be taken so that more households can benefit from stimulative monetary policy designed to encourage faster economic growth.”
JON C. OGG