Tags: housing bubble | interest rates | Fed | stimulus

Stanford's Taylor: 'Sooner the Better' for Fed to Unwind QE

Monday, 26 Aug 2013 10:21 AM

Stanford University Professor John Taylor, creator of a rule for guiding monetary policy, said the Federal Reserve should begin as soon as possible to taper its purchases of securities.

“The sooner the better to get started with it,” Taylor said in a Bloomberg Television interview with Sara Eisen from the Fed’s annual monetary conference in Jackson Hole, Wyoming.

Policymakers should “be very deliberative, indicate it’s a strategy and it could be adjusted.”

The Federal Open Market Committee next meets Sept. 17 and 18. Some 65 percent of economists surveyed by Bloomberg this month expect the U.S. central bank to begin trimming its $85 billion in monthly bond purchases at that meeting.

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The FOMC’s first step may be small, with monthly purchases tapered by $10 billion to a $75 billion pace, according to the median estimate in the survey of 48 economists conducted Aug. 9-13. The Fed will probably end the bond buying, a strategy known as quantitative easing, by mid-2014, the survey showed.

Taylor said papers delivered at this week’s Fed conference reflect “quite a bit of skepticism” about how effective the bond purchases were.

As interest rates move higher in anticipation of tapering bond purchases, “that tends to offset whatever positive effects there were” from the policy, he said.

Taylor said “there’s a lot of angst out there” about how quickly the Fed will unwind quantitative easing.

“There’s 35 central banks represented at this conference,” he said. “Many of them are concerned about the impact of the exit on them.”

Bernanke Absent

The gathering began without Ben S. Bernanke, who became the first chairman to pass up the meeting since 1988. Bank of Japan Governor Haruhiko Kuroda and Bank of Mexico Governor Agustin Carstens were among the speakers at the three-day symposium held by the Kansas City Fed, entitled “Global Dimensions of Unconventional Monetary Policy.”

Taylor first published in 1993 his interest-rate formula, which measures where a central bank should set its policy rate based on inflation and growth.

The Fed kept its main interest rate below the Taylor Rule from 2001 to 2006. Taylor and other critics said the failure to raise rates more quickly contributed to the housing bubble, leading to the deepest recession in seven decades when it burst.

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