Federal Reserve Bank of St. Louis President James Bullard said the Fed’s program to buy $600 billion in bonds showed that central banks can wield a forceful policy tool even after cutting interest rates close to zero.
The purchase of Treasury securities “has shown that the Fed can conduct an effective monetary stabilization policy even when policy rates are near zero,” Bullard said today in remarks prepared for a conference in St. Louis.
The Federal Open Market Committee’s second round of large- scale asset purchases is scheduled to end today, and Fed officials are discussing how quickly to begin tightening policy. They are also weighing a strategy for withdrawing stimulus and reducing the central bank’s $2.86-billion balance sheet, which grew to a record level during the second round of so called quantitative easing, or QE2.
“The financial-market effects of QE2 looked the same as if the FOMC had reduced the policy rate substantially,” Bullard said at his regional bank’s conference on quantitative easing. “Real interest rates declined, inflation expectations rose, the dollar depreciated and equity prices rose,” he said.
The impact from the Fed’s purchases on the real economy would probably lag by six to 12 months, Bullard said.
“Real effects are difficult to disentangle because other shocks hit the economy in the meantime,” he said.
Other papers at the conference include research by St. Louis Fed economist Christopher J. Neely indicating that the large-scale bond purchases also influenced international bond prices.
A paper by two economists at the Fed’s board in Washington, Stefania D’Amico and Thomas B. King, said that the purchases generally resulted in a “persistent downward shift in the yield curve” of about 20 to 30 basis points and caused an average 3.5 basis-point decline in yields on the day of the purchase. A basis point is 0.01 percentage point.
Bullard, 50, has led the St. Louis Fed since 2008. Fed presidents rotate voting on monetary policy with Bullard next voting in 2013.
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