Defending the Fed's asset-purchase program, Federal Reserve Bank of Boston President and Chief Executive Officer Eric S. Rosengren Friday noted changes in the 10-year Treasury prices since May and how Fed communications played a role in the changes.
When the Fed talked about tapering the asset-purchase program, it "appears to have had an outsized impact on long-term rates," Rosengren said in a speech in New York, according to prepared text released by the Fed. "The recent market reactions provide a challenge to the view, argued by some, that the purchase program has no impact - since asset prices seem so sensitive to announcements of even a potential, modest reduction in purchases sometime in the future."
While rates have been "volatile" since May, he said, they "have tended to respond noticeably to monetary policy announcements and new economic data - particularly data related to the monthly report on the employment situation. That reflects, in part, prior communication about the Committee's focus on the labor market. While long-term rates declined after the last FOMC announcement, they still remain about 100 basis points higher than they were at the beginning of May. Certainly contributing to the rapid rise in long-term rates were announcements, speeches, and testimony by Fed officials that indicated that if the economy were to improve as they expected at that time, it might be appropriate to reduce the central bank's monthly purchases of Treasury and mortgage-backed securities sometime in the fall."
When short-term interest rates are close to zero, the Fed faces "communication challenges." With zero-bound rates, communicating "the sequence and nature of future actions" is a policy tool, one that's "highly dependent on the reactions and expectations of a range of economic actors" including investors, firms and households.
"Unfortunately, the communication challenges are not at all trivial," Rosengren said. "Combined with the lack of historical precedent for many of the Fed's recent monetary policy actions, these challenges make us realistic and humble about our ability to gauge the likely impact of our communications at the zero lower bound."
Pointing to interest-sensitive sectors, specifically homes and car sales, which has improved recently, Rosengren said, "So it would appear that recent monetary policy actions can have - and have had - a meaningful impact on the economy. And the fact that the possibility of small future changes in policy could elicit such large movements in market interest rates and asset prices emphasizes that while central bank communication can be a powerful tool, it has also proven an imprecise and unpredictable instrument in terms of its impact on long-term rates."