Un­con­ven­tional Fed Pol­icy Gets Mixed As­sess­ment

The Bond Buyer - - Market News - — Gary E. Siegel

For­ward guid­ance and quan­ti­ta­tive eas­ing be­came im­por­tant tools for the Fed­eral Re­serve in the Great Re­ces­sion, but re­ceived mixed re­views as to their ef­fec­tive­ness.

With in­ter­est rates re­main­ing lower than tra­di­tional lev­els, such un­con­ven­tional mon­e­tary pol­icy may be needed again in the fu­ture.

“These tools likely strength­ened the eco­nomic re­cov­ery and helped re­turn in­fla­tion to the Fed’s tar­get — although their full im­pact re­mains uncertain,” writes Glenn D. Rude­busch, se­nior pol­icy ad­vi­sor and ex­ec­u­tive vice pres­i­dent in the Eco­nomic Re­search Depart­ment of the Fed­eral Re­serve Bank of San Fran­cisco, in an Eco­nomic Let­ter.

While for­ward guid­ance is con­sid­ered ef­fec­tive, there are costs, “and while it can be an im­por­tant pol­icy tool, the ex­tent of its fu­ture use by the Fed is open to de­bate.”

Quan­ti­ta­tive eas­ing, or QE, in­volved Fed pur­chases of longer-term bonds. “Much ev­i­dence re­gard­ing the ef­fects of QE comes from event stud­ies that ex­am­ine how as­set prices shift in the hours af­ter a Fed QE an­nounce­ment,” Rude­busch notes.

But, he writes, eval­u­at­ing the im­me­di­ate re­ac­tion of the mar­kets is “not a good mea­sure of the ef­fects of QE if they are re­versed in a few days or weeks, and the pos­si­bil­ity of such re­ver­sals is one rea­son why the eco­nomic im­pact of QE is still de­bated.”

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