Why Fed hawks and doves are both starting to talk about ending QE

March 27, 2013

Inside the Federal Reserve, consensus is growing over the need to dial back the central bank’s $85-billion-dollar-a-month bond-buying program -- but for very different reasons. It boils down to two sides: Hawks, who want to curtail quantitative easing programs because of the risks they create. And doves, who see evidence that they're working well enough at stimulating growth that they might soon no longer be needed.

The day will come for the end of QE3. But when? (Manuel Balce Ceneta/Associated Press)
Fed Chairman Ben Bernanke. The day will come for the end of QE3. But when? (Manuel Balce Ceneta/Associated Press)

First, let’s consider the hawks, who worry that the Fed is doing too much to juice the economy. They want to scale back on so-called quantitative easing because they are worried that the program’s unintended consequences are outweighing any benefits.

Kansas City Fed President Esther George warned that the Fed’s exit from the bond purchases could be potentially messy. Fed Governor Jeremy Stein has voted for the measures, but also has expressed worries that easy monetary policy could be creating credit bubbles. Markets shuddered when minutes from the Fed’s December policy-setting meeting revealed members had discussed the costs of the program -- with some calling for ending it as early as this year.

That put Fed Chairman Ben S. Bernanke and his supporters on the defensive. The Fed promised to keep the punch flowing until there is substantial improvement in the labor market -- and the unemployment rate is simply still too high.

But over the past week, there has been a slight shift in tone. The arguments they make to defend the bond purchases also sound like pretty good reasons to start slowing them down: Pushing down long-term interest rates has helped spur the rebound in the housing market and create jobs. Stocks are on the rise as investors seek higher yields. The economy is getting stronger, which means it will need less help from the Fed.

“At some point, I expect that I will see sufficient evidence of economic momentum to cause me to favor gradually dialing back the pace of asset purchases,” New York Fed President Bill Dudley, allied with Bernanke as a supporter of QE, said this week.

In a speech Wednesday, Boston Fed President Eric Rosengren, one of the most dovish members of the committee, opened the door to reducing the amount of bond purchases this year. Analysis by his staff showed $500 billion in purchases helps reduce the unemployment rate by one-quarter percentage point, which amounts to 400,000 jobs.

"As the economy continues to improve and labor markets and inflation return to more normalized levels, the recent levels of monetary accommodation can be reduced," Rosengren said.

Bernanke also addressed the issue at a news conference last week, in which he stressed the importance of calibrating the bond purchases to the labor market and economic conditions. Translation: The Fed is thinking about scaling back purchases, but it will dial them right back up if the economy starts to go back down the tubes. It's worth a reminder that even when the Fed ceases buying $85 billion in additional bonds, that doesn't mean it will raise its target for short-term interest rates or start actively selling off bonds in its portfolio anytime soon.

Exactly when Bernanke and the FOMC will be ready to make that call to taper new purchases remains unclear. But the chairman is likely to find support from both sides when he does.

Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.
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Dylan Matthews · March 27, 2013