APRIL 8, 2019
The Federal Reserve is rebutting President Donald Trump’s assertion that tightening monetary policy is hurting the economy.
In a paper published Friday, the St. Louis Fed said the central bank’s move to reduce the level of bonds on its balance sheet — “quantitative tightening” as it has become known — will not have any noticeable negative impact on growth.
That runs directly counter to Trump’s assertion the same day that the policy normalization process has “really slowed us down.”
“It is true that removing unusual monetary accommodation will likely result in less real activity and lower prices than otherwise, but the ongoing shrinkage of the Fed’s balance sheet was not responsible for bearish asset markets in 2018, nor is it likely to significantly retard activity going forward,” Fed economist Christopher J. Neely wrote.
The Fed has been allowing up to $50 billion a month in Treasurys and mortgage-backed securities to roll off what had once been a $4.5 trillion balance sheet. However, the central bank announced in March that it would begin tapering the reduction in May and virtually end it altogether in September, after likely reducing the holdings by barely $1 trillion.
Trump not only called for the end of ‘QT’ but also said the Fed should consider another round of easing like it did in three stages during and after the financial crisis.
The president spoke shortly after the Labor Department reported that nonfarm payrolls grew by a better than expected 196,000 in March and the unemployment rate remained at 3.8 percent, near a 50-year low. Despite the solid jobs report, questions remain about the durability of the Trump boom that saw GDP rise 2.9 percent during 2018.
‘They’ve really slowed us down’
Trump has been a frequent Fed critic as the central bank has raised rates and moved to undo the historically easy monetary policy in place for much of the past decade. He has blamed the central bank for the fourth-quarter stock market meltdown in 2018 and said growth would have been much faster without rate hikes, four of which came last year.
“I personally think the Fed should drop rates,” the president told reporters Friday. “I think they’ve really slowed us down. There’s no inflation. In terms of quantitative tightening, it should actually now be quantitative easing.”
However, Neely pushed back on the president’s ideas about the future policy path, writing that “quantitative tightening will probably not affect the economy in any noticeable way.”
“The pace of the recent decline in the Fed’s asset holdings — if such declines continue — would take at least five years to return to the pre-crisis trend,” Neely said. “Such gradual effects contrast with the large, discrete asset price changes that immediately followed the original asset purchase announcements and reflected almost the whole expected near-term change in fundamentals.”
Neely cited four specific reasons why QT won’t bite as hard:
- Benefits to yields won’t reverse as QE had only repaired “temporarily illiquid markets.”
- Because the Fed ended asset purchases in 2014 and started hiking rates in 2015, tightening already has been happening with little negative impact on either financial markets or the economy.
- The Treasury has been issuing longer-dated bonds at lower yields, helping mitigate some of the damage by the Fed also shedding similar duration debt.
- The Fed has reduced its holdings by such a small amount that it will take years to be felt by markets.
Neely notes the angst caused in markets by the tightening moves, but said the Fed’s actions are “unlikely to significantly impede economic activity.”
In addition to ending the bond portfolio rolloff, the Fed also pledged to take a “patient” approach to further rate hikes and indicated that no increases are likely in 2019 unless the data changes significantly.