Just days after the Federal Reserve launched a new round of unconventional monetary policy easing, a top Fed official with a record of supporting such moves on Friday questioned how effective the latest move will be.
John Williams, president of the San Francisco Federal Reserve Bank, defended the track record of the Fed's large-scale bond purchases in lowering long-term borrowing costs, but he said it was unclear how much the purchases help the real economy.
Specifically, does lowering Treasury yields through large-scale asset purchases have the same effect on the economy as an equivalent movement in the federal funds rate? Williams said in a speech to the Swiss National Bank Research Conference in Zurich. To what extent is it the size or the composition of the central bank's balance sheet that matters?
The Fed, which has kept short-term interest rates near zero since December 2008 and purchased $2.3 trillion of Treasuries and mortgage-backed securities, on Wednesday moved to counter what it called significant downside risks to the economy with a new $400 billion program to weight its $2.85 trillion balance sheet more heavily toward longer-term securities.
Williams, whose speech was calibrated to spark debate rather than provide answers, said those questions require further study.
He has said before that twisting the Fed's balance sheet toward longer-term securities is not likely to have as big of an impact on long-term rates as outright bond purchases.
But Williams, who rotates into a voting spot on the Fed's policy-setting panel next year, has supported other moves by the Fed to ease policy, including its most recent bond-buying program and its pledge to keep rates ultra-low through at least mid-2013.
In general, his comments and focus on unconventional tools suggest that the Fed is continuing to contemplate and discuss policy options that could potentially add further monetary stimulus, Barclays Capital Research's Troy Davig wrote in a note on Friday.
World stocks fell after the Fed's action on Wednesday, on worries that such policies may not be enough to stop the United States, and other countries, from tipping into a new recession.
Speaking in Washington, the president of the New York Federal Reserve Bank, William Dudley, blamed the build-up of debt before the financial crisis for an unusually anemic recovery, and said regulators need to profoundly overhaul the financial system to prevent the advent of new crises.
He did not comment on the Fed's recent action, which drew three dissents from Fed policy makers who opposed further easing.
Neither did Williams, but his comments provided some insight into the debate raging behind the Fed's closed-door policy-setting meeting that ended on Wednesday.
What are the advantages of targeting a specific quantity of large-scale asset purchases as opposed to targeting a level of ceiling on interest rates at a particular point on the yield curve? he asked. How do these policies change our thinking about the optimal rate of inflation?
Williams said he had no answers, but noted that finding them will be critical to future monetary policy success.
(Reporting by Catherine Bosley; additional reporting by Mark Felsenthal and David Clarke in Washington. Writing by Ann Saphir in Chicago; Editing by Leslie Adler)