Fed should consider holding more short-term bonds: Rosengren

HONG KONG (Reuters) - The U.S. Federal Reserve should consider raising the proportion of short-term Treasury bonds it holds to give itself more options to respond to economic pullbacks, a top policy maker said on Tuesday.

FILE PHOTO: The Federal Reserve Bank of Boston's President and CEO Eric S. Rosengren speaks during the "Hyman P. Minsky Conference on the State of the U.S. and World Economies", in New York, April 17, 2013. REUTERS/Keith Bedford

Speaking at a conference in Hong Kong, Eric Rosengren, president of the Federal Reserve Bank of Boston, offered a hard-line defense for one of policy makers’ most controversial responses to the 2008 global financial crisis: bond buying.

He is the third Fed policymaker in two days to weigh in on exactly what bonds the Fed should keep and why, following speeches by his counterparts in Chicago and Philadelphia.

Rosengren, who is a voter this year on the Fed’s policy-setting committee, said holding shorter-term bonds could help the U.S. central bank in a future crisis by giving officials a security they could exchange for longer-term bonds to push those rates down without expanding their balance sheet.

“Increasing the share of U.S. Treasury bills and more quickly lowering the duration of securities held as assets may be an important goal as part of the normalization process,” he said at the Credit Suisse Asian Investment Conference.

“This would give the Federal Reserve the flexibility to take the policy step of lengthening the maturity of its balance sheet assets the next time a significant economic downturn occurs.”

Interest rates, he said, would likely hit their lower limits near zero percent again during a recession and bond buying would be an option. The Fed currently targets short-term rates between 2.25 and 2.5 percent.

“Some have suggested that the Fed’s balance sheet is partly responsible for financial market volatility at the end of 2018, but I disagree,” Rosengren said.

“The Federal Reserve’s balance sheet decline has been quite gradual, and proceeded along roughly the same path when stock prices have been rising as when stock prices have been falling.”

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The Fed bought bonds to help the economy after the financial crisis, but drew criticism for a policy seen increasing the risk of inflation or financial instability.

Last year, the Fed was criticized for letting the bonds disappear. President Donald Trump on Twitter pressed the central bank to stop the balance sheet runoff, and shares sank on Wall Street after Fed Chairman Jerome Powell said in December that plans to trim the holdings were on “automatic pilot.”

In January, the Fed said it would be willing to adjust its plans if financial conditions warranted. Last week policymakers announced the runoff would end by September.

The Fed may have to decide to buy assets again even in the absence of a recession, Rosengren said, to keep a significant amount of bank reserves. Policy makers now control rates by paying banks a percentage on the assets they keep in reserve, but those are likely to decline from current levels for reasons out of the Fed’s control.

“I dare say it is important for market observers, lawmakers and the public to become more comfortable with the benefits of central banks using their balance sheet tools to pursue the public interest,” Rosengren said.


Rosengren also said he expected U.S. economic growth to be “pretty weak” in the first quarter, but that it will likely be much closer to 2-2.5 percent for the rest of the year.

While acknowledging that a pause by the Fed was the “responsible thing to do,” he cautioned investors not to read too much in the inverted U.S. Treasury yield curve, which is widely seen as an indicator of recession.

The 10-year U.S. yield has fallen more than 20 basis points since the Fed last week ditched projections for raising rates this year and announced the end of its balance sheet reduction, reaching levels below short-term yields.

“The fact that we’re not fighting inflation, but actually trying to make sure that inflation expectations remain well-anchored, is a very different economic environment than we’ve seen during previous cycles,” Rosengren said.

“So I don’t take nearly as much information from the shape of the yield curve as some people do,” he added.

Reporting by Noah Sin in Hong Kong; Writing by Trevor Hunnicutt in New York and Marius Zaharia in Hong Kong; Editing by Leslie Adler and Darren Schuettler