Federal Reserve Bank of New York President William C. Dudley said he has not decided whether the Fed’s next move should be to enlarge or to shrink its bond buying program as he called for a fresh look at its eventual retreat from record asset purchases.
“Because the outlook is uncertain, I cannot be sure which way — up or down — the next change will be,” Dudley said in prepared remarks for a speech in New York.
Dudley adds his voice to a debate on the Federal Open Market Committee about what to do with its program of bond purchases, designed to lower the 7.5 percent unemployment rate. While many Fed officials have voiced support for shrinking purchases as the next step, Dudley, who is also vice chairman of the FOMC, signaled willingness to increase purchases.
Officials last week expressed a range of views on the program. Philadelphia Fed President Charles Plosser called for shrinking purchases at the Fed’s next meeting; San Francisco’s John Williams favored a reduction “perhaps as early as this summer.” By contrast, Boston’s Eric Rosengren said low inflation and high unemployment suggest there may be a need for even more stimulus, not less.
In discussing the next steps for the stimulus program, Dudley said the Fed may need to overhaul its plan to eventually normalize monetary policy, which was adopted in 2011.
“We may need to update our thinking with respect to the so-called exit principles,” Dudley said. The strategy said the Fed would stop reinvesting the assets on its balance sheet, raise short-term interest rates, and finally sell mortgage- backed securities. “This seems stale in several respects,” he said.
Dudley said that the strategy is outdated because policy makers have since pledged to hold their target interest rate near zero until unemployment falls to 6.5 percent. He also said the central bank may want to abandon its plan to sell mortgage- backed securities eventually.
“To the extent that the committee wants to reduce the risk of disrupting market functioning during normalization, it could decide to indicate that it will avoid selling the MBS portfolio during the early stages of the normalization process,” Dudley said. “Moreover, to the extent that the committee wants to mitigate the risk of a sharp increase in long-term rates, it could judge that it would prefer not to commit to agency MBS sales.”
Dudley spoke to the Japan Society in New York, and his remarks offered reflections on the experience of central banks such as the Fed and the Bank of Japan that have lowered their target interest rates near zero and still been unable to generate a full-fledged economic recovery.
The Bank of Japan, led by Governor Haruhiko Kuroda, announced last month that it would double the monetary base as part of a plan to end more than a decade of deflation that has weighed down the world’s third-largest economy. Prices excluding fresh food haven’t risen 2 percent in any year since 1997, when a sales tax was increased.
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