The US Federal Reserve should slow its purchases of Treasuries before it turns to mortgage-backed securities when the time comes to taper QE3, Eric Rosengren, president of the Boston Fed, said in an interview with the Financial Times.
The remarks make Mr Rosengren one of the first Fed officials to comment on how a taper should be carried out, adding to a growing debate within the Fed about when to slow the $85bn-a-month, third round of quantitative easing that it launched last September.
“My own preference is, when tapering does become appropriate, that it be disproportionately done on the Treasury side,” said Mr Rosengren.
“I would be very comfortable not slowing down the mortgage-backed securities until we had dramatically brought the [rate of buying] Treasuries down.”
The Fed is currently buying MBS at $40bn a month and Treasuries at $45bn a month in an effort to drive down long-term interest rates and speed up the recovery of the US labour market.
Mr Rosengren said that MBS purchases had worked well because they helped to bring down mortgage rates and spur the recovery of the housing market. “We should continue with a particularly effective part of our programme,” he said.
The Boston Fed president, who has been one of the strongest proponents of aggressive monetary easing to speed up the recovery, also endorsed a change in “exit strategy” that would have the central bank keep its MBS until they mature instead of selling them once the economy recovers.
“I actually would be very comfortable – this is my own personal view – with not selling mortgage-backed securities at all,” said Mr Rosengren. Holding on to mortgage securities would not only give a further boost to the economy, but would also mean the Fed was less likely to suffer losses, or disrupt the MBS market by dumping a large volume of securities.
Mr Rosengren said that he thought the economy was improving but it was still too soon to taper QE3. He said the economy had done better than he would have expected last September given tax increases, automatic sequestration cuts to public spending, and the rocky handling of Cyprus.
“My underlying forecast is that there is pretty good strength,” he said.
“Just in my own neighbourhood, I saw in the last two weeks several trucks loaded with wood to build a new house – all cut and ready to go,” said Mr Rosengren, referring to the pick-up in the housing sector. “I haven’t seen a truck like that in five years.”
But he noted the disappointing jobs data for March – when the US added only 88,000 jobs – and said he wanted confirmation of the improvement in economic outlook before supporting a taper.
“We’ll have to see as we go through the year: do we look more like the most recent data that we got from payroll employment or does it look more like what was happening in January and February?” he said.
Mr Rosengren said there was still a lot of uncertainty around his forecast of a 7.25 per cent unemployment rate, down from 7.6 per cent today, by the end of the year.
“While my forecast already indicates a substantial improvement in the outlook – a better unemployment rate forecast than I would have had last September – I want those error bands to start getting narrower.”
The speed of a taper should depend on how fast the health of the economy improves. “If we’re just growing very slowly, we probably should taper very slowly,” said Mr Rosengren. “If it looks like we’re actually getting much more strength than we expected then I’d want to taper a little bit more rapidly.”
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