Powell Should Send a Message on Phasing Out Quantitative Easing
(Bloomberg Opinion) -- Investors will be listening closely when Federal Reserve Chair Jerome Powell addresses the Jackson Hole conference of central bankers this week. Powell won’t announce a plan to begin tapering the Fed’s bond-buying program — that will happen, at the earliest, after the central bank’s policy-making committee meets next month — but his remarks will be scoured for any fresh indication of his thinking.
He ought to nudge expectations in the direction suggested lately by some other top Fed officials. Short of making a formal announcement, he should say he’d prefer tapering to start soon and be completed by the spring.
Does it really make sense to bring quantitative easing to a close, now that the delta variant of Covid-19 is threatening the economic recovery, and delaying the plans of many businesses to get their people back to work and operations back to normal? (Participants in the Jackson Hole event won’t have needed a reminder, but they got one anyway. The organizers canceled their plans for an in-person gathering and switched at short notice to a virtual format.) Yes, it still makes sense to phase out QE. It isn’t the right tool for current conditions, and leaving the program in place serves to narrow the Fed’s options as conditions change.
The primary goal of QE is to press down long-term interest rates and support aggregate demand. The Fed’s promise to keep buying bonds for an extended period made this push more forceful — which was appropriate after confidence slumped at the start of the pandemic. At the moment, lack of demand isn’t the problem. Supply-side disruptions including shortages of workers and essential parts mean that an excess of demand is pushing up prices rather than boosting output and jobs. This is especially clear in the markets for housing and cars, but the pattern goes wider than that.
The Fed’s preferred measure of inflation stands at 3.5%, well above its 2% target. The unemployment rate is low, at 5.4%, and many employers are finding it hard to fill vacancies. Asset prices have surged and the risk of bubbles and financial instability is growing. All this suggests it’s past time to start dialing back the Fed’s commitment to maximum stimulus.
Granted, the delta variant introduces new uncertainties. But there’s good reason to suppose, as James Bullard of the St. Louis Fed has pointed out, that the next phase of the pandemic won’t suppress demand as much as the first one did. If new stimulus does turn out to be required, the Fed can always deliver it by resuming QE.
The crucial point is that uncertainty now cuts two ways. To deliver maximum stimulus when it was required, the Fed committed itself to zero percent interest rates and a prolonged period of bond-buying. Too much inflation was not a risk — quite the opposite — so this promise was well-judged. Now, inflation is indeed a risk, so the central bank must untie its hands and recover its ability to tighten or loosen policy as the situation demands. The QE program inhibits its freedom because the Fed has led investors to believe that it will wind down its bond-buying gradually before it turns, if necessary, to raising interest rates.
Things have changed. The Fed now has to grapple with two risks: that demand will fall short causing the recovery to falter, or that too much demand will force inflation above target and keep it there. Nobody says this is easy. But the costs of extending the commitment to maximum stimulus have come to outweigh the benefits. That’s the message that Powell ought to convey this week: For now, QE has had its day.
Editorials are written by the Bloomberg Opinion editorial board.
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