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Friday, February 25, 2011

Fed's Yellen on Unconventional Monetary Policy and Communications

by Calculated Risk on 2/25/2011 03:20:00 PM

This speech from Fed Vice Chair Janet Yellen provides the Fed's view of the impact of QE2: Unconventional Monetary Policy and Central Bank Communications (see Effectiveness of Asset Purchases and the associated graphs).

Yellen also commented on forward guidance:

Down the road, once the recovery is well established and the appropriate time for beginning to firm the stance of policy appears to be drawing near, the FOMC will naturally need to adjust its "extended period" guidance and develop an alternative communications strategy to shape market expectations about the policy outlook.
This is part of the timeline I outlined earlier this week: When will the Fed raise rates?

My view is the Fed will complete the $600 billion “QE2” large-scale asset purchase program (probably in June, but they may taper it off), then they will stop the reinvestment of maturing MBS and Treasury Securities (could be concurrent with the end of QE2), and then the FOMC will change the "extended period" language. That suggests the Fed will not raise until 2012 at the earliest.

Earlier today, Richmond Fed President Jeffrey Lacker suggested QE2 might end early, via MarketWatch:
Federal Reserve should seriously consider adjusting its $600 billion bond-buying program in light of a recent pickup in U.S. economic activity, said Jeffrey Lacker, president of the Richmond Federal Reserve Bank, on Tuesday.
“The distinct improvement in the economic outlook since the [bond-buying] program was initiated suggests taking that re-evaluation quite seriously,” Lacker said ...
I think it is very unlikely the program will end early. Note: I've heard suggestions that high oil prices might lead to an expanded QE2 (or QE3) - that also seems unlikely to me at this point. It would probably take renewed weakness in the U.S. economy before we see additional stimulus.