First things first: The Federal Reserve is not going to end QE3 any time soon.
If there were any lingering doubts about the central bank’s commitment to its $85-billion-dollar-a-month bond-buying program, Fed Vice Chair Janet Yellen attempted to lay them to rest in a speech Monday morning at the spring conference of the National Association for Business Economics.
“I do not see any [costs] that would cause me to advocate a curtailment of our purchase program.”
“We would not consider selling assets off until after the federal funds rate is increased.”
“I view the balance of risks as still calling for a highly accommodative monetary policy.”
For Fedspeak, this is as straightforward as it’s going to get.
That said, Yellen did provide some clues to the debate that has divided the Fed: how and when the central bank should end its bond-buying program. Officially, the Fed has said it would continue purchasing Treasury bonds and mortgage-backed securities until there was “significant improvement” in the labor market. Of course, it didn’t define what that meant, and minutes of the Fed’s policy-making meetings show some officials have already begun calling for a slowdown or outright stop before the end of the year.
But Yellen said the labor market is still "far from healed." And even when it improves, a drop in the unemployment rate alone would not be enough to convince her to end QE, since it might merely be the result of people leaving the labor force. She’s also waiting to see a pickup in job creation and hiring. Yellen said the number of people who quit their jobs, versus being fired, could also be telling: Most people don’t voluntarily leave their jobs unless they’re confident they can find a new one. And, of course, the economy needs to be growing more robustly to make all this happen.
Yellen also highlighted an important point that has seemed lost on some in markets: There’s a difference between the Fed no longer buying long-term bonds and actually selling off those assets. The Fed is injecting more and more stimulus into the economy with each month of purchases. Yellen said that means ending the purchases isn’t really a tightening, but a leveling off of accommodation. It’s possible the Fed will never sell its assets, instead holding them until they mature.
Her remarks this morning dovetailed (pun intended) with a speech by Fed Chairman Ben S. Bernanke in San Francisco on Friday night also aimed at dampening speculation about the end of quantitative easing.
Bernanke focused on the market forces that are holding down interest rates, which in turn are reinforcing the Fed’s desire to keep rates low.
He cited the weak recovery is the primary culprit, not only in the U.S. but also in most other major industrialized economies. The fact that the picture is rather gloomy across the globe has only increased investor demand for the relative safety of U.S. bonds, pushing down rates even further.
As my colleague Neil Irwin reports, Bernanke and Yellen also offered a contrary view to the idea that new financial bubbles are emerging and that the Fed should seriously consider raising interest rates to stop them.
The biggest threat of all to the economy? The two most powerful members of the Fed agree that it is short-circuiting the recovery by ending its stimulus too soon.