I’m looking for convincing evidence of sustained, ongoing improvement in the labor market and economy. The latest economic news has been encouraging. But it will take more solid evidence to convince me that it’s time to trim our asset purchases. An important rule in both forecasting and policymaking is not to overreact to what may turn out to be just a blip in the data. But, assuming my economic forecast holds true, I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer. If that happens, we could start tapering our purchases then. If all goes as hoped, we could end the purchase program sometime late this year.

It’s important to note that tapering our purchases and even ending the purchase program doesn’t mean that we are removing all the monetary stimulus that comes from our longer-term securities holdings. Instead, even as we cut back our purchases, we’re still adding monetary accommodation and exerting greater downward pressure on interest rates. Economic theory and real-world evidence indicate that it’s not the pace at which we buy securities that matters for influencing financial conditions. Rather, it’s the size and composition of the assets we hold on our balance sheet. So, even when we stop adding to our portfolio, it doesn’t mean we’re tightening policy.

“It is full steam ahead right now,” Bullard said today on Bloomberg Radio’s “Hays Advantage” with Kathleen Hays. “That is exactly what the committee is doing.”

“What I’d like to see is some good healthy peaks that have job creation well above the rate of new entrants into the labor market, followed not by valleys that take back some of that progress but at the very least by a nice plateau that can be the basis for some more peaks later,” he said.

“I don’t think we have to be in any hurry” to cut stimulus, Bullard said. “The committee has more comfort in a situation in which inflation is low.”

“If inflation drifted down in conjunction with renewed economic weakness,” the committee may consider increasing its monthly bond buying, he said.

The St. Louis Fed chief said when it comes time to slow purchases, he favors reducing the pace by small increments in response to changes in the economy. “I would be very comfortable moving in small amounts -- $10-or-$15 billion at a time,” Bullard said in the interview at the St. Louis Fed. “We are getting much closer” to the committee agreeing to a tapering approach, as indicated by Bernanke’s comments last month.

There are encouraging developments in the economy, to be sure, but the evidence of sustainable momentum that will deliver “substantial improvement in the outlook for the labor market” is not yet conclusive. I favor a “wait and watch” mode for the time being. Several more months of positive data—especially in a range of employment data—would give me confidence that the economy has real traction and is unlikely to backslide.
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The key word in the phrase “substantial improvement in the outlook for the labor market” is outlook. For my part, a critical consideration in judging how much longer asset purchases should continue will be confidence in the positive outlook. Confidence that is solidly grounded in improving economic data, accumulated over a sufficient span of time, will help me conclude that the work of the large-scale asset purchase program, as a temporary supplement to conventional interest-rate policy, is complete.

The decision to curtail asset purchases ought to be forward-looking, and in my judgment, that point could come later this year or early next year without harm to the momentum of the economy.

Federal Reserve Bank of Boston President Eric Rosengren said today the central bank should be “drawing down” its bond buying of $85 billion a month as the economy improves and at some point it should stop the purchases.

“On the other hand, if the economy does much worse, we have the option to be buying more of them,” he said in an audience question-and-answer session in Manchester, New Hampshire.

As reported by Bloomberg News

Business leaders in my District report being pleasantly surprised by orders and activity levels so far this year.

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The economy is still far from full employment of its resources, and monetary policy still needs to remain accommodative. Undoubtedly, more unforeseen developments, and risks, lie ahead. However, I would like to conclude with an emphasis on the positive. The economy appears to be on a steady, albeit moderate, growth path, and the potential risks associated with our large-scale asset purchases appear manageable at the moment. I would regard a slowing in the pace of asset purchases to be a welcome direction for monetary policy if it resulted from a significant improvement in the outlook for labor market conditions. That outcome could emerge before long, but it still remains to be seen.

For these reasons, it can be useful to gauge our purchases both relative to gross issuance as well as the amount of outstanding stock that can likely be delivered into the Desk’s TBA purchases. Since the current purchase program began, the Desk’s purchases have accounted for about 50 percent of gross issuance on average, below the average monthly purchase rate of roughly two-thirds during the first round of large-scale MBS purchases in 2009. If refinancing activity declines, leading to a decrease in gross issuance, our purchases could exceed these levels. Such higher levels still seem unlikely to cause significant market functioning issues, given the considerable supply of existing stock that we believe could be delivered into the Desk’s TBA purchases over time. Nevertheless, not all new securities are issued in the TBA market, and it is difficult to estimate future gross issuance, so the Desk monitors the purchasable supply of MBS closely.

Investors’ disagreement and uncertainty about the overall stance of monetary policy will reflect their views on the future evolution of both the federal funds rate and the SOMA portfolio. One way to get a sense of the overall level of policy uncertainty is to convert the SOMA portfolio into “fed funds equivalents.”[8] With this translation, it is possible to estimate the hypothetical level of the federal funds rate that would provide a similar amount of monetary policy accommodation as both the actual level of the federal funds rate and the size of the SOMA portfolio.

[8] Fed funds equivalents are calculated by comparing the change in the 10-year Treasury yield due to asset purchases to the change that historically occurred following movements in the target federal funds rate. This is a simple framework, so the uncertainty around this measure is likely large

“I’m personally in favor of tapering back our mortgage- backed security purchases,” Fisher told reporters today at a conference in Abu Dhabi. “I think we’ve assisted the recovery of the housing market. We have a pretty robust housing situation right now. We don’t want to slip backwards."

As reported by Bloomberg News

If quantitative thresholds are good for interest rate guidance, why not also have such thresholds for the asset purchase program? There are two reasons. There is somewhat more uncertainty about the efficacy and costs associated with asset purchases than rate guidance and we are likely to learn more about the efficacy and costs as the program unfolds.

So what is this likely to mean in practice? In my view, we should calibrate the total amount of purchases to that needed to deliver a substantial improvement in labor market conditions, by allowing the flow rate of purchases to respond to material changes in the labor market outlook. This makes sense because the benefits of additional accommodation will gradually diminish as we get closer to our full employment and price stability objectives and become more confident that we will reach them in a timely manner. At some point, I expect that I will see sufficient evidence of economic momentum to cause me to favor gradually dialing back the pace of asset purchases.

Of course, any subsequent bad news could lead me to favor dialing them back up again.

The lack of thresholds [for the Fed’s open-ended asset purchases] comes from the complexity of the problem. On the one hand, we have benefits which are associated with improvements in the economy, but there are also costs associated with unconventional policy, such as the potential effects on financial stability, which are hard to quantify and which people have different views about.

So to this point, we've not been able to give quantitative thresholds for the asset purchases in the same way that we have for the federal funds rate target. We're going to continue to try to provide information as we go forward.

In particular, as I mentioned today, as we make progress towards our objective, we may adjust the flow rate of purchases month to month to appropriately calibrate the amount of accommodation we're providing, given the outlook for the labor market.

In terms of further color, again, given the complexity of the issue, we've not given quantitative analysis or quantitative thresholds. I would say that we'll be looking for sustained improvement in a range of key labor market indicators, including, obviously, payrolls, unemployment rate, but also others, like the hiring rate, claims for unemployment insurance, quit rates, wage rates, and so on, be looking for sustained improvement across a range of indicators and in a way that's taking place throughout the economy.

And since we're looking at the outlook, we're looking at the prospects rather than the current state of the labor market, we'll also be looking at things like growth to try to understand whether there's sufficient momentum in the economy to provide demand for labor going forwards. So that will allow to us look through, perhaps, some temporary fluctuations associated with short-term shocks or problems.

We think it makes more sense to have our policy variable, which is the rate of flow of purchases respond in a more continuous or sensitive way to changes in the outlook. So as we make progress towards our ultimate objective of substantial improvement, we may adjust the rate of flow of purchases accordingly.

Now, we won't do that every meeting, won't do that frequently. But when we see that the conditions -- or the situation has changed in a meaningful way, then we may well adjust the pace of purchases in order to keep the level of accommodation consistent with the outlook and, secondly, to help provide the markets with some sense of progress – how much progress is being made so that it can make better judgments.

… Well, again, we've not been able to come to an agreement about what guidance we should give. And part of the concern is, is that we go forward, we -- you know, we'll have to factor in the efficacy, which is another issue. I mean, there's a wide range of views about how effective asset purchases are in terms of moving the economy.

So as we move forward in time, we'll be learning about how effective the policy is and what costs and risks there may be associated with it. And as we do that, perhaps we'll be able to give more explicit guidance. And I -- I agree with you 100 percent that that would be more effective, if we could give a numerical guidance.

[I]t is entirely possible that it might be appropriate at some point to adjust the pace of MBS purchases in response to developments in primary or secondary mortgage markets. Within the context of the Committee's judgment about the appropriate overall level of monetary accommodation, such an adjustment could result in an increase or decrease in the pace of total asset purchases, or it could lead to a change in the composition of purchases.

The FOMC’s current asset purchase program has some key differences from earlier policy initiatives… Under the current asset purchase program, the FOMC has announced only the monthly pace and composition of purchases and noted that purchases will continue until there is a substantial improvement in the outlook for the labor market in the context of price stability. The Committee has also indicated that it will take appropriate account of the likely efficacy and costs of its purchases when adjusting their size, pace, and composition… Instead, under this conditional, outcome-based approach, the Committee has enacted a policy that will adjust to incoming information about labor market conditions and the broader economy, as well as its ongoing assessment of the efficacy and costs of purchases. Retaining the flexibility to adjust purchases is an important feature of the program, given our relatively limited experience with the use of the balance sheet as a monetary policy tool and the uncertainty about the policy’s effects.

There are some key differences between our Treasury and MBS operations that I would like to discuss. As counterparties in our operations, you know that outright purchases of Treasury securities are conducted through large-scale, multiple-security auctions via the Desk’s FedTrade platform, which allows all primary dealers to place multiple offers across all eligible securities simultaneously. Purchases of MBS, on the other hand, are currently conducted using TradeWeb, a commercial trading platform. The platform allows buyers to solicit offers for one security at a time from up to four counterparties, so the Desk includes dealers in operations on a rotating basis. As a result, the Desk purchases MBS in a series of smaller-scale, more frequent auctions. We are currently expanding the FedTrade platform, in order to have more flexibility in conducting MBS auctions in the future.

CAMPBELL: There seems to be a lot of evidence out there that the benefits of low interest rate and quantitative easing are accruing primarily to the federal government, foreign governments and large banks. I think clearly those are not the entities that need to or that are doing the lion's share of hiring, or need to do the majority of -- of hiring.

But how do you -- do you agree with that view, and how do you rationalize QE given that view out there, that, that's who is benefiting primarily from.

BERNANKE: I completely disagree with that. This is very much focused at the average American citizen. Our estimates are that we've helped create many private sector jobs, government jobs of course have been declining quite significantly. People are able to buy houses at very low mortgage rates, refinance at low mortgage rates. People are able to get car loans at low rates. So their house values have gone up, so that they feel, you know, more financially secure. So, in a lot of dimensions, we have, I think, benefited Main Street, and that's certainly our objective.

From the other sectors, we often get complaints. For example, banks have complained about the low interest rates squeezing their interest margin, for example. I think the main benefits are those that are affecting the broader economy and thus the broad group of Americans.