A report presented Friday by economists at the U.S. Monetary Policy Forum questioned the effectiveness of the Federal Reserve’s asset purchases during the 2008 financial crisis.
The conference is held annually at the University of Chicago Booth School of Business, uniting Fed officials with economists from both Wall Street and academia. The paper in question was entitled “A Skeptical View of the Impact of the Fed’s Balance Sheet,” and its authors included authors include Morgan Stanley Senior Desk Economist David Greenlaw, Bank of America Merrill Lynch Head of Global Economic Research Ethan Harris, University of Wisconsin economics professor Kenneth West, and University of California economist James Hamilton.
As reported by CNBC, the paper argues that “the consensus view that the Fed's quantitative easing lowered 10-year Treasury yields by 1 percentage point (100 basis points) was overstated, and that Fed asset purchases did not have as much impact on long Treasury yields as generally believed.” Instead, it claims that the effects of the Fed’s crisis-era actions on 10-year yields were temporary.
"Going forward, we expect the Federal Reserve's balance sheet to stay large," the paper states, continuing to argue that "the most important and reliable instrument of monetary policy is the short-term interest rate."
New York Fed President William Dudley countered the paper’s arguments in a statement posted on the New York Fed’s official website. Dudley said, “While additional study of the effects of large-scale asset purchase (LSAP) programs should be encouraged—as it furthers our understanding of the use of these unconventional monetary policy tools—the paper's findings do not, in my mind, invalidate the use of LSAPs when the Federal Reserve is operating at or close to the zero lower bound for short-term interest rates. That is the key issue—not the magnitude of the effects of LSAPs or whether short-term interest rates should be the primary tool of monetary policy."
Dudley went on to argue that “LSAPs remain useful to have in the toolkit for those times when the short-term interest rate tool may not be available.”
On Friday, the Federal Reserve delivered its semi-annual Monetary Policy Report to Congress, noting widespread improvements in the U.S. economy and an uptick inflation near the end of 2017. The report stated the Fed’s belief that inflation will continue to stay at or near the Fed’s target rate of 2 percent during 2018. The report did not shed much light on whether the Fed plans three or four interest rate hikes in 2018, but more may be revealed when new Fed Chair Jerome Powell testifies before Congress on Wednesday, February 28.