Rosengren Says Fed Should Consider a Wider Range of Assets

(Bloomberg) -- Federal Reserve Bank of Boston President Eric Rosengren said policy makers should be allowed to buy a broader range of assets if they lack sufficient ammunition to fight off a recession with interest-rate cuts and bond purchases.

With 10-year U.S. Treasury yields notes already at record lows, Rosengren said typical quantitative easing may not work as it did during the 2008 financial crisis. Therefore, the Fed may need the flexibility enjoyed by policy makers in Europe and Japan.

“We should allow the central bank to purchase a broader range of securities or assets,” Rosengren said in a speech Friday in New York. “Such a policy, however, would require a change in the Federal Reserve Act.”

U.S. law currently limits Fed purchases to “any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.” That translates to buying U.S. government and agency debt and mortgages issued by federal housing agencies.

The Fed has traditionally maintained a strong internal resistance to expanding its purchases beyond Treasury securities because such activities are essentially credit allocation and leave the central bank vulnerable to criticism of favoritism if it’s investing in the bonds or stocks of specific companies.

“New deal progressives are not going to tolerate this unless the unemployment rate has risen sharply,” said Mark Spindel, a co-author of a book about Congress and the Fed.

During the financial crisis, the Fed bought agency-backed mortgage securities to help revive markets for housing debt. As of March 4, the Fed held $1.37 trillion of mortgage securities.

Fed Cut

Rosengren’s remarks came as yields on 10-year Treasury notes plunged to as low as 0.66% on concern the spreading virus would dent the world’s largest economy.

The Fed lowered its benchmark policy rate by 50 basis points in an emergency move Tuesday to a 1% to 1.25% range, with investors betting it will cut by a further half percentage point by the end of this month. Rosengren’s not a voter this year on the rate-setting Federal Open Market Committee.

“If the economic reaction to the coronavirus does result in the funds rate falling to its effective lower bound, this heightened sensitivity of the 10-year U.S. Treasury rate to adverse news raises the possibility that the 10-year U.S. Treasury rate could follow close behind,” Rosengren said. “There would be little room for the Federal Reserve to lower rates through large purchases of long-term Treasury securities.”

The comments come as the Fed is in the middle of a review of its policy tools and strategy -- a process that has been somewhat overwhelmed by the sudden and stunning loss of policy space as longer-term yields decline and traders forecast another half-point cut at the March 17-18 meeting.

Rosengren said that if the Fed was permitted to broaden the scope of assets it buys, the U.S. Treasury should indemnify it against losses, while noting that fiscal policy should also shoulder a greater burden with interest rates already low. He also resurrected the idea of establishing a facility that could buy broader assets provided that Treasury insured the central bank against risk.

During the financial crisis, the Fed invoked “unusual and exigent” circumstances to create funds that bought assets from failing financial institutions. The bailout move was controversial with lawmakers.

All of these ideas point sharply to the fact that central bankers realize they are running out of room at a time when very few ideas have come out of the Trump administration to cushion the economy from coronavirus disruptions.

“Somewhat surprisingly, there seems to be little movement toward making automatic stabilizers more prominent, or preparing to invest significantly more in the sorts of public investment projects that yield positive returns,” Rosengren said at conference hosted by the Shadow Open Market Committee.

Larry Kudlow, President Donald Trump’s top economic adviser, said Friday that he wants “timely and targeted micro-measures” without giving many details.

To contact the reporters on this story: Christopher Condon in Washington at ccondon4@bloomberg.net;Craig Torres in Washington at ctorres3@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Alister Bull, Jeff Kearns

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