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William English

lines on the record: 100
first: 2024-06-10
most recent: 2024-06-10
sittings or episodes: 1
sources: podcast

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“So the new framework came actually in August of 2020 and what they said was a few things, but I think there were a couple of important steps there that I'd emphasize. One is that they said they were going to focus on shortfalls for maximum employment, not worry as much about overshoots of maximum employment. And the other was, as you say, flexible average inflation targeting. That was quite circumscribed. The idea was that if they were constrained by the lower bound, they couldn't provide as much accommodation as they would have liked. And as a result of that, the economy was weak for a long time and inflation was low for a long time. They would aim not just to get inflation back to target, back to two, but to overshoot for a while. And I think the reason”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“So you have the informal guidance such as Powell saying, I believe in the summer of 2020, we're not thinking about raising interest rates. We're not even thinking about thinking about interest rates. And then you have the formal framework, monetary policy framework. And I believe there was an overhaul called FAIT flexible average inflation targeting that was announced formally on December 2020 December 2020, which is quite considerable timing because that is when inflation started to explode higher. Is that policy still formally in effect even though clearly it is not when inflation went to 9%, the Fed isn't going to say, oh, we're going to keep interest rates at zero because we were below target in the post-GFC era and pre-2020 era. But just because they're not acting on it is, you know, that is a framework. And if you adopt a framework, don't you have to officially unadopt a framework?”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“And they stuck with that guidance. They actually had an out. The statement had a sentence that said, of course, if risks arise, we'll do the right thing. They chose to not point to that. They chose instead to stick with that guidance. And I think that did slow them down some. I think they would have been raising rates maybe in the fall of 21 instead of March of 22 if they hadn't had that guidance in place. But I think they were uncomfortable abandoning the guidance again because it would have effects on their credibility. And that slowed them down some when it came time to tighten policy.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“In Australia, where the RBA said basically we don't think we're going to raise rates for three years in order to make that more compelling. They said they were going to buy securities with maturities out to three years at a very, very low interest rate. And then, of course, inflation kicked up and they got stuck. They didn't want to keep rates low for three years. They didn't want to keep buying the securities. And they had to bail out in that guidance in the fall of 21. And they did. But I think it did hurt their credibility and it was a problem. For the Fed, the guidance that they had was not as firm as that. But nonetheless, they had chosen pretty strong forward guidance. They said they didn't expect to be raising rates, at least until they got to maximum employment. Inflation got to two and was expected to overshoot two.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“In order to have the effects on longer term rates and boost the economy today, which is the purpose after all. On the other hand, if you make it too commitment-like, then you really can be constrained. If things don't turn out as you like, or sorry, don't turn out as you expected, you'll be constrained later on. So you say we're not going to raise rates for some period of time, and then the economy just does something very different than what you expected, and then you're stuck with the choice between abandoning the guidance, which is presumably bad for your credibility, bad for the power of guidance in the future, or sticking with it, but really ending up with policy not where you want it to be. And I think a number of central banks kind of had that problem after the COVID crisis. The most dramatic was...”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Maybe go back to another of the lessons that we had in our book. One of the lessons was essentially be careful with forward guidance. And the issue there is if you want the forward guidance to be powerful and here maybe I want to broaden forward guidance to be statements you're making about the federal fund trade. Also statements you're making about purchases potentially because once you move to kind of open-ended purchases, you say we're going to buy until something happens. You have very similar issues there. When you're making statements like that, as the Fed did in September of 2020 for rates and then in December for purchases, you're torn between two things. One is you want to make that guidance as firm and compelling as possible.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“So forward guidance is most powerful when there's a deviation between market expectations and what the Federal Reserve wants to signal, because if everything is in alignment, there's no rate to move. An example on when the market is projecting policy, i.e. interest rates to be too tight, too high would be 2009, might an opposite of that be 2022 when at the beginning of the year the two-year was still quite low, probably somewhere between 1% and 2%. And by the end of the year, it was between 4% to 5%. And I think it's fair to say that the Federal Reserve's forward guidance during 2022 was a substantial and B definitely a large delta between what the market was forecasting at the NDD year and what the Fed wanted to forecast.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Unless you go into really commitment-like guidance, promising to do things that you're not going to like later and they don't expect you to commit to now. And that potentially has power, but that also, of course, raises a host of possible problems.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Forward guidance at that point, it's confirming what people already think that probably helps some, but I don't think it's immensely powerful. The asset purchases are still potentially powerful because you're still taking duration out of the market. You're still pushing downturn premiums. You're still pushing down long-term rates. Now, even there, if markets expect you to do the QE, they're forward-looking markets. They're going to adjust longer-term rates down now. They're not going to wait for you to do the purchases. But if you then didn't do the purchases, rates would back up. And so you've got to follow through and do the purchases to keep the rates low. So I think the purchases are powerful kind of regardless. The forward guidance, it's a little funny because if they understand you, they kind of understand your reaction function. It's not actually going to do that much.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Really, not going to raise rates as soon as you think. And the market's not quite getting it. And it wasn't until the committee moved to a date-based forward guidance in the summer of 2011. And they said, we really don't think it's going to be appropriate to raise rates until 2013, two years out. And so that had a pretty big effect on the expected path of the funds rate. That did push down long-term rates. And then they went through various other iterations of communication. But the key point is that foreign guidance is powerful when markets don't understand you. It's less powerful when they already understand you. If you go into a recession and you cut to the zero bound and markup participants say, yeah, the zero bound, they're going to be there for quite a while, which is kind of where we were in 2020.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“I think the committee thought that the unemployment and inflation projections in market participants' minds were about right, 9% unemployment, 1% inflation. But they thought it was crazy that they weren't going to raise rates with an unemployment rate of 9% and inflation of 1%. That would be really not the right thing to do. So that was a situation where forward guidance was potentially quite helpful because markets really didn't understand the reaction function of the central bankers. And the central bankers, by convincing them that they were going to wait much longer to raise rates, could have a pretty useful effect on long-term rates. And in fact, the next several years... Was the committee trying to say more strongly?”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“So it's a great question, and it's a complicated answer, I think. On forward guidance, the key question is how wrong are market expectations. If markets already understand what you're going to do with the federal fund rate, then forward guidance, telling them what they already know won't actually do anything. It won't change long-term rates at all. In some situations where market beliefs really are wrong, I think forward guidance can be really helpful and powerful. So, for example, I remember in March of 2009, another very consequential FOMC meeting for unconventional policy, market participants at that time thought the Fed was going to be raising rates away from the zero bound before the end of 2009, with an unemployment rate of nine percent and inflation of one percent.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“If the committee had been able to cut rates further, if they'd woken up one day in 2011 and said, oh, the Fed funds rate's actually two. It's not zero. They would have cut to zero, I think, more or less straight away. They wanted to provide more accommodation, but they were just uncertain about how these tools would work and how things would go. And so they did it only gradually.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“So they were, I think, a little slow, a little tentative using these new tools, and rightly because they were worried that they would have unanticipated effects that would be bad and they would turn out to have damaging consequences. They wanted to be careful about that. So they took a couple steps, then they waited to see what happened. They took a couple steps. They waited to see what happened. They took a couple steps. And also, as I said earlier, I think the effects of the financial crisis on the economy just were bigger and more durable than they expected as well. But nonetheless, I mean, in the end, the assessment in that paper, the Enganlabach and Rechneider paper, is these unconventional tools were reasonably powerful. They were quite helpful. But on the other hand, they really didn't solve the problem.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“As I remember the effect on the unemployment rate was, I forget, one and a quarter percent, something like that. So the unemployment rate went up from 5 to 10. The unconventional policy pulled it down by one and a half percentage points, something like that. So it was significant. It was helpful. But as Ben Bernanke was fond of saying, it was not a panacea that the unconventional policy didn't get you back to full employment really quickly. I think another issue there that stands out in their paper is that the effects of the unconventional policy built up over time. You didn't reach peak effects until 2014 or 2015. They were buying until 2014 and the forward guidance was strengthened over time and really didn't get to its final form until the end of”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Guidance that was done on output, on employment, on inflation over the period from the financial crisis when the paper came out in 2015. And their calculations, which were based on some very nice work by Ken and Lee and Min Wei at the board on the effects of purchases, suggested that the purchases push down the 10-year treasury yield about 100 basis points, peak effect, then it slowly came back. And the forward guidance plus that 100 basis points on the 10-year treasury yield boosted the economy by an amount that was roughly equivalent to maybe 400 basis points of easing of the federal funds rate in conventional times. So a pretty big effect, but not really as big as you would have liked.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Just cutting the federal funds rate. And so, as I said, we had rules of thumb that I don't remember exactly, but it was some number of hundreds of billions of dollars of purchases of 10-year equivalents because it matters what you're buying and what's the duration you're taking out of the private portfolios had a supportive effect for the economy that was something like 100 basis points say of easing or 25 basis points of easing and so you could have rules of thumb that look like that i i like there's a nice paper by engen laubach and reich schneider that was published in 2015 kind of a retrospective on the QE that tried to look at it was really looking at both QE and forward guidance and trying to figure out what was the entire effect of all the QE that was done and all the four”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“A lot of work was done on this, of course, and we developed various rules of thumb. We tried to come up with rules of thumb along the lines of purchases of this size are roughly like the effect of in normal times, a reduction in the federal funds rate of some size. And how do you do that? Well, first, you have to have an estimate of when you make the purchases how much does that push down the 10-year yield. And then you need a model to tell you, and how much does the lower 10-year yield with the short end held in place at the lower pound, how much does that give you in terms of accommodation, boosting output, boosting employment, and so on? And then you compare that to what you would see from the same model away from the zero lower bound.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“And so, how do you think about how much quantitative easing, what size of purchases needs to be done in order to move a 10-year yield down one basis point or 10 basis points? I imagine it might depend on a whole host of factors such as who the marginal buyer is, where the yield is. I imagine it's much easier to lower 10 year at 10% than it is at 0% because as you indicated, people might just go out of the 10-year and go into cash. Can you describe the various mathematical work that you've done to try and estimate that and how it might depend on a whole host of factors?”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“And I think that sense that these purchases will have to be very large was something that we anticipated in the run-up to doing those first purchase programs. I think the purchase programs were bigger than the committee thought they would need to be. But that was because the economy stayed. Remained weak for a long time, and so needed more support from monetary policy than I think they'd thought at the outset of the purchases.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“One response is, well, you just do twice the purchases that you thought you thought before you wanted to push down term premiums by some amount, you still can. You just have to do somewhat bigger purchases. I mean, the striking thing about the doing of the asset purchases was the size. And they ended up being really, really big, both after the financial crisis and then even bigger after the pandemic. So these purchases have to be really big. But these are huge markets, of course. The Treasury and the MBS markets are gigantic. And so if what you're trying to do is move around the portfolios of private agents by enough that they care and they start adjusting the pricing that they're willing to accept, you're going to have to do really big purchases.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“The research I did was ex post. It was kind of looking at the first couple of purchase programs and trying to figure out how big those effects were. I think those effects, there are a range of estimates about how big those effects were. I think that they were, I don't know, roughly in line with what I would have thought. We tried, of course, early in the going to figure out kind of rough estimates of what QE might be worth in terms of reducing long-term rates. I think the effects were, if I remember right, somewhat smaller than those kind of preliminary rough numbers that we wrote down were as we got evidence and we could see, but they were the same order of magnitude. They weren't particularly different, the difference is if the purchases have an effect that's half the size that you thought.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“So you've wrote about quantitative easing, did a lot of research on quantitative easing. How did its implementation differ from your thinking of it before it was enacted? In other words, what did you learn before, okay, we've done a lot of theoretical work on it, but the proof is in the pudding. Let's actually see how it works. Did it play out roughly as you expected? Was it more effective, less effective than you had anticipated? What was different about its reality versus your conception of it before it actually existed?”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Were zero, say, or roughly zero. There's no obvious reason why the 10-year yield couldn't go negative term premium. But on the other hand, there's kind of the same thought as the flight to currency thought, right? Why would anybody hold a 10-year treasury when they could hold very, very liquid, safe assets like reserves or overnight RRP that pay a higher rate? And gosh, they're really convenient. They're really liquid. So I'm not sure. I guess I'm still not entirely sure. Probably you could get with enough QE and strong enough forward guidance. You might be able to get modest negative 10-year yields, even with short-term rates around zero. But I'm not positive. It's a good question.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Power that the Fed got to be able to pay interest on reserves because otherwise there would have been a risk that by doing the QE that the Fed wanted to do, it would have pushed reserves so high that short-term rates would have fallen to negative levels. And that didn't happen because the Fed had the ability to pay interest on reserves. Now you asked as part of that question, were there concerns that longer-term rates could fall below zero, even if short-term rates in some sense were held at very low positive rates, could long-term rates go negative? And that's a good question and one I've never quite made up my own mind on. On the one hand, it seems like it should be possible. You're pushing downturn premiums. Term premiums did go negative because of QE. So if the expected future short rates over the next long period of time,”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Have the timing exactly right. So in the fall of 2008, as part of one of the emergency bills passed through Congress, I forget which one, the Fed got authority to pay interest on reserves. At that point, QE was not a problem in that the Fed could keep interest rates near zero by paying interest on reserves, and it could make reserves as big as you want to do the QE. So that was actually a really important.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Of quantitative easing by expanding its balance sheet, creating liabilities reserved on the banks, and using them to buy financial assets, mainly U.S. treasuries and agency mortgage-backed securities, that it would drive the price up and the yields down to levels that might be below zero. And can you describe how the corridor system, basically the way that the Federal Reserve controlled interest rates at the time was by varying the level of reserve. So if it was going to massively increase the level of reserves, it might have to change the way it would control rates, which as I learned from your paper, that in October of 2008, the Federal Reserve was at last allowed to pay reserve on interest rates balance, which led to moving from the corridor system to the floor system, which we now have.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Also, worried about adverse effects on money market mutual funds. They find it hard because of their structure to handle negative interest. If you're not careful, you end up breaking the buck and you end up with a run on your money market fund. So anyway, we thought that the risks were significant. The committee in thinking through what they wanted to do in the fall of 2010 said, gee, we could go to negative rates. We don't think we can get a huge amount of accommodation from that. And it has these kind of very hard to judge, but potentially big risks associated with it. We know QE works. We're comfortable with that. We've done that. So they instead decided to do QE too. But it was an active discussion and there was some work done on that at the board.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Memo or maybe even two on Could you go to negative rates and what would that mean? And I think at the time we thought, yeah, you could go negative, but at some point banks, instead of holding reserves, paying a negative interest rate, would stockpile currency. And we tried to look at what would the cost of stockpiling currency be. You have to have bault space. You have to have insurance. You have to have guards. You have to have trucks to move the currency into the vault space and so on. We tried to estimate the cost of that. I forget where we came out. I think it was like minus 35 basis points or something like that. And at that point, you'd start to see a flight to currency. I think that turns out to have been an underestimate. You can go lower. But then we talked about, do you want to do that? What do you think the effect of that would be? And we said, gee, there'd be adverse effects on the banks.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“For competitive reasons to have negative rates on retail deposits because their customers will then hate them forever and they'll pull out their deposits. And there is quizzed. Their net interest margins get squeezed if you go to negative rates. And there's some evidence that that happened as well in countries that went negative. There is sometimes discussion about a reversal rate. You can take rates negative. At some point, it's no longer expansionary to take rates further negative because you're putting the screws on your banking system. But negative rates are possible. And there was discussion ultimately by the committee about that when the committee was thinking about the second big purchase program that began in the fall of 2010. The staff did a lot of work on what else could be done. And again, these memos are published.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“And we saw this over time in the Swiss ultimately went to minus 75 basis points other European central banks went to negative rates, the Bank of Japan went to negative rates. So we found out over time that zero isn't really the lower bound, that you can go below that in some central banks chose to do so. You still can't go kind of as low as you'd like. I think the staff simulations as of March 2009 were saying what you'd really like to do FOMC is cut rates to like minus 600 basis points. I think there you really would get a flight to currency. You couldn't go that far. And there are other issues around negative rates, significantly negative rates in particular if banks are unwilling or unable.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“I think in December of 2008, I don't remember us thinking a lot about negative rate policy. I think the thought was you get to zero or something around zero, and then people can hold currency. And currency is a government obligation that pays zero. And so how much below zero do you think you can go before you see a flight into currency and people will not let you, in effect, push market rates below zero. They'll just hold currency. And that turned out to be not right.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Committee decided that they did want to do that. And so they then spent the next several years thinking through what's the right way to do forward guidance, what's the right way to do asset purchases, and so on. But the big turning point, I think, was December of 2008. There was a lot of staff work that went into that, but a fair amount of that work looked back to this earlier work that had been done around 2003. And that was when people first really focused on the fact that this could be a significant problem.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“They ultimately by March of 2009 had used both forward guidance by saying they were in no hurry to raise rates and of course did ultimately a massive first round of QE. I forget 1.7 trillion or something like that. So they went back and looked at that earlier work. And we did a lot of work. I mean, the arrow was sent to the FOMC are often published with a lag. And if you look on the board website, you'll see about 20 memos that were sent to the committee in December of 2008. And Ben Bernanke was setting up the committee for a discussion of exactly this issue. Is it in some sense time to pull the ripcord and try to use these unconventional tools to provide additional accommodation because we're going to be constrained at the zero bound?”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“So that was discussed in the Federal Reserve and in public. I mean, these were published papers around 2003. Then, of course, the economy recovered and rates were raised and we kind of got away from the zero bound. But a lot of that work still was in people's minds. And when things went badly in 2007 and 2008, The question for the FOMC was, what do you want to do? You're going to be constrained by the zero bound. They got to December 2008. The economy was in free fall post-Lehman, and they wanted to provide accommodation. So they were going to cut the funds rate to zero. And the question was, what do you do then? And they...”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Long term rates, you can think of them as kind of a sum of three pieces. One is expected future short rates over the life of the longer-term instrument. One is a term premium. How much extra do you pay to issue along rather than short? And then there may be a liquidity premium if there are issues in longer-term markets. There could also be a liquidity premium. And forward guidance operates by moving the expected future level of short rates. And so you're making perhaps kind of partial commitments to keep rates lower for longer. And that means that that expected average level of short-term rates over the next 10 years, say, is lower and that should pull down 10-year yields. And you can buy a lot of securities and through portfolio balance effects that can shift down term premiums and lower long-term rates.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“When I became aware of these issues, it was probably around 2003, when at the Fed we got worried that we could get stuck at the zero bound, as it happened in Japan. The federal fund trade fell as low as 1%. And the question was, well, what do you do if you get constrained by the lower bound? And there was a fair amount of work done. Ben Bernanke was then a governor. He gave some speeches and wrote a paper, I think Don Cohn was involved. Brian Sack was involved. And they wrote a couple of papers thinking through if you get to the lower bound,”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“I want to now turn to directly your work on quantitative easing. I've read a 2012 paper co-written by you about the rationale and effects of the Federal Reserve's large-scale asset purchase programs, commonly referred to as quantitative easing. And we'll get into your findings and your views then, but can you just take us back into when you joined the Division of Monetary Affairs for the Board of Governors ultimately becoming its director in 2010? When did you first hear about quantitative and easing which I believe originated in Japan? How did your work with then Fed chair Ben Bernanke, who was also very interested in quantitative easing? How did it develop and then when did you both and as well as other colleagues at the Fed realize the time is now as you did in November 2008 it's go time this is the time to do the policy can you just kind of take us back and take us on that journey”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“I think it's very hard to answer without making further assumptions, in particular the key question is, what would the Treasury have issued if the Fed weren't holding a bunch of Treasury securities? The Treasury would have had to have issued a bunch of securities to the public if they had issued short things. I know bills and very short coupon securities, I think the effect would be very small on the 10-year yield. If they termed out and they issued a whole lot of five-year, 10-year, 20-year, 30-year securities, that would be increasing the amount of duration risk in private portfolios. That would be increasing term premiums and pushing term premiums up. But I think without saying something pretty explicit about what do we think the issuance would look like if the Fed weren't holding those treasuries.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Of that is to push down term premiums and lower longer term interest rates. But the debt hasn't changed and ultimately I think that's kind of the fundamental factor that's going to drive fiscal issues unless the Fed truly wants to monetize debt, which it does not and generate a lot of seniorage revenue by running with high inflation for a long time. The Fed isn't doing anything much about debt, the level of debt, the level of debt is determined by the fiscal policy makers and the Fed is just moving around the maturity structure of the debt. And who knows in some sense what would have been the maturity structure the treasury would have chosen there are a bunch of treasury debt management decisions that they have to make. I think the effects there may be smaller than you would think at first blush.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“One thing to bear in mind is that when the Fed goes out and buys a treasury, say it has to finance that purchase the way it does that is by creating reserves on which it's paying interest, and so the interest bearing debt of the consolidated government entity, the Fed plus the Treasury, hasn't changed, and that debt could be higher or lower. That's really a fiscal policy issue, not a monetary policy issue. The Fed is just moving around the average maturity or the whole maturity distribution of that debt by choosing what it buys and the amount that it buys. And so that, if they, in effect, what QE does is it shortens that average maturity, it pulls some of the longer-term debt out of the market, replaces it with reserves or overnight RRPs.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“This is a case where the central bank probably should take account of what's going on with fiscal policy and maybe even should talk about it. Inflation is high, but it would have been higher if we hadn't done these other things. And that would have been a potential problem. Maybe it could have gotten built into expectations and become a more durable problem. So I think our view was there are some important effects of fiscal policy and at least broadly you should be willing to talk about them, even if for obvious reasons you don't want to get into the details of whatever is being fought over in the parliament or in the Congress.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“They should and do, I think, try to stay out of that. I think Chair Powell has been a little bit more cautious. He's been more willing to say we're going to stay in Orlane. We're not going to worry about that. But nonetheless, I mean, the Fed can and maybe should talk very broadly about if we get on a better path and over time interest rates will be lower and that will be helpful for investment and growth if we don't, then rates are going to be higher and that'll be bad for growth. I think in our book we talked also about programs that were undertaken particularly in European countries to address the inflationary effects of high energy prices after the Russian innovation of Ukraine. Those programs seemed reasonably effective and again I think this is”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“I think the Fed has always been pretty careful about this. In the sense that the Fed just doesn't want to be in the middle of difficult and ultimately political discussions about the priorities for the budget. But on the other hand, back when I was at the board, I remember Ben Bernanke getting questions about what should fiscal policy look like, and he always said, well, over the longer run, we're on an unsustainable path and we need to try to make some adjustments to get onto a sustainable path. But in the short run, the economy is weak and it needs some fiscal support. And so it's a complicated trade-off over time in terms of fiscal policy. But he very much wanted to stay out of any particular program, any particular tax or spending program. And so those are things where it's just not the Fed's role.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Has happened to our star, the neutral real interest rate. But if that interest rate really is significantly higher now, that does have real implications for fiscal policymakers. They're going to be paying more in terms of revenue, tax revenue, just to pay the interest on the debt. And that will make the budget calculations tougher and presumably will lead them over time to spend less than they otherwise would have. I think that's almost surely the case and probably should be, right? I mean, at some level, at least for kind of capital expenditures and human capital expenditures, you should be thinking about what's the rate of return we're going to get on this investment and how does that compare to the cost at which we're borrowing money. And so if the rate at which they're borrowing money goes up, some”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“So, I would expect it to be true. Yeah. I mean, if borrowing is more expensive, then Congress will feel more constrained. You have to be a little bit careful because you have to worry about real versus nominal interest rates and real interest rates relative to the growth rate of the economy and so on. Whereas R relative to G and these sorts of questions. So it's not quite as simple as just saying the interest rate is high to the extent the interest rate is high, but it's high because inflation is high and it's just compensation for inflation. That's a very different situation than if real interest rates are high. But nonetheless, I would expect that over time, let's say real interest rates are higher now. There is a fundamental question now for fiscal and monetary policymakers of what”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“The big interest bill that they're paying every year, and they'll be wondering about that and maybe pushing the Fed on that. So it's a risk, I think. We'll see if that turns out to be a significant problem, but it certainly is something we flagged in the book.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Be broadly conceived needed fiscal support. Then in addition to that, as a result of the crisis, the level of debt in the US government debt went up a lot. Deficits got much larger. And so when it came time to raise rates, rates went up much higher than they had for a long time. The effect of that on the budget is big. The interest cost of that debt is substantial. So I think these effects, which for a long time for a generation were pretty small, suddenly looked not so small. And as we said, I think the result of that could be increased political pressure on the Fed if there's a big fiscal effort to kind of get the deficit down and so on. There'll be a lot of people in Capitol Hill looking at”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“Separated, they never really were separated. There always were fiscal implications of monetary policy. But for a long time, they were relatively small because interest rates were low. And so changes in monetary policy didn't have big implications for fiscal policy. And that, I think, was helpful. That wasn't true during this post-COVID period for a few reasons. I mean, one is monetary policymakers particularly in their role as crisis managers, lenders of last resort, needed fiscal support. And so the Congress passed in the COVID relief act, a provision of funds to the Treasury to provide support for Fed lending programs that were not risk-free that involved taking on some real credit risk. And so there was a link that monetary policy.”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT
“So, I should start by saying this is joint work with Kristen Forbes and Anhelibide. We put the document, the book together, and we got chapters from many central bankers around the world. We're very grateful for their input. That's right. They're one of our lessons, I think, is that it would be very nice and very helpful if monetary policy and fiscal policy were really”
2024-06-10 · Forward Guidance · Secrets of the Federal Reserve’s Unconventional Monetary Policy | William English, former Director of Division of Monetary Affairs for the Fed Board of Governors, on Quantitative Easing (QE) and Forward Guidance · IDENTIFIED FROM THE TRANSCRIPT