JACKSON HOLE, Wyo. Aug 23 The Federal Reserve
should concentrate its unconventional monetary stimulus on
mortgage asset purchases, according to a new study released on
Friday, ditching Treasury bond buys which the authors say have
not had much of an effect.
Presented at the Kansas City Fed's annual Jackson Hole
conference, the paper argues rather controversially that the
central bank should begin its exit strategy by selling
Treasuries, something that is hard to conceive given the recent
speedy selloff in government bonds.
The absence of concrete guidance as to the goal of asset
purchases, which has been vaguely defined as aimed toward
substantial improvement in the outlook for the labor market,
neutralizes their impact and complicates an eventual exit,
according to the paper's authors, Arvind Krishnamurthy of
Northwestern and Annette Vissing-Jorgensen of Berkeley.
"Without such a framework, investors do not know the
conditions under which (asset buys) will occur or be unwound,
which undercuts the efficacy of policy targeted at long-term
asset values," the authors write.
Minutes from the Fed's July meeting, released on Wednesday,
suggested policymakers had already considered such a step but,
for now, decided against it.
"The Committee also considered whether to add more
information concerning the contingent outlook for asset
purchases to the policy statement, but judged that doing so
might prompt an unwarranted shift in market expectations
regarding asset purchases," the minutes said.
The effects of the U.S. central bank's asset purchases,
which began after the Fed had already brought official interest
rates down in late 2008, are much narrower than policymakers'
had foreseen, they say.
In particular, Fed Chairman Ben Bernanke and others have
argued that asset purchases work by taking safe assets out of
the market and therefore forcing cautious investors to take more
risk. In official parlance, this is known as the "portfolio
balance effect," affecting rates in markets well beyond those
targeted by the Fed.
The impact of asset buying is a lot narrower than Fed
officials contend, according to the authors of the paper.
"It does not, as the Fed proposes, work through broad
channels such as affecting the term premium on all long-term
bonds," the paper finds.
Instead, mortgage-buying has been more effective because, by
targeting a specific sector that was under duress, Fed officials
have been able to create scarcity of supply in the mortgage
market, leading prices - and therefore credit availability - to
"We find that (mortgage purchases) are more economically
beneficial than Treasury (buying)," the authors write.
Recently, Fed officials have worried excess risk-taking may
have gone a step too far, potentially leading to dangerous asset
bubbles - hence all the talk of a 'tapering' in quantitative
In response to the worst recession in generations, the Fed
has left official rates effectively at zero for over four years,
and is on track to buy over $3 trillion in assets in an effort
to support still-weak growth.
The U.S. economy expanded at an annualized 1.7 percent rate
in the second quarter, while the jobless rate remains at an
elevated 7.4 percent.