REUTERS/ Keith Bedford
The Federal Reserve has been debating
how best to wind down its $4.5 trillion balance sheet, but
that doesn’t mean policymakers are retiring the controversial
recession-era policy tool, known as quantitative easing or QE.
Two top Fed officials, speaking at a Hoover Institution
conference panel, argued that because estimates for the “neutral”
interest rate are now around 3%, the central bank is likely to
need to bring rates down to zero more frequently than in the
This means the Fed will find itself reaching for other policy
tools to add stimulus to growth and employment, namely
large-scale purchases of government bonds like the ones
undertaken during and after the financial crisis.
“I think it is inevitable that we’re going to be talking about
the balance sheet expanding during recessions,” said Eric
Rosengren, president of the Boston Fed.
St. Louis Fed President James Bullard offered a similar view,
saying there was a “distinct possibility” the Fed would again
have to resort to quantitative easing or QE when the economy hits
its next downturn.
The officials were responding to questions about the efficacy of
bond buys and their pitfalls, including increased political
scrutiny on the central bank.
The central bankers, including Chicago Fed President Charles
Evans, pushed back against the notion that QE’s impact had been
minor. They pointed to sharp moves in asset prices, including not
only stocks but also Treasury bonds, as indicating a significant
In addition, Evans argued that unemployment during the recession,
while it peaked at 10% in 2009 but has
since fallen to 4.4%, would have been much worse without the
Fed’s interventions given where conditions stood during the worst
slump since the Great Depression.
Evans said making sure the central bank actually meets its 2%
inflation target, which it has undershot for most of the economic
recovery, is another way to ensure the Fed can avoid needing to
push official borrowing costs to zero again.
“The problem of the zero lower bound is very real,” he said. “We
know what to do when inflation gets to high.”