The President of the Federal Reserve Bank of Boston -- Eric
Rosengren -- advocated sizable asset purchases by the Fed when he
was interviewed on CNBC Tuesday morning. Rosengren is not a voting
member of the Federal Open Market Committee, but he is an alternate
member for both 2012 and 2013 and has some influence over Fed
In the interview, Rosengren advocated for the Fed to increase
its holdings of mortgage backed securities. By doing so, the Fed
could help to further decrease real borrowing costs for consumers
and companies, while restoring consumer confidence.
Sarah Eisen of Bloomberg Surveillance pointed out Tuesday
real income growth is outpacing real consumption
Rosengren advocated sizable purchases with no limit on the total
number, explaining that the Fed's only limit of easing is the
amount of bonds outstanding.
Further QE programs could restore consumer confidence in two
ways: reflating asset prices and creating a wealth effect and by
decreasing unemployment and causing further optimism in those
searching for employment. By achieving both of those, the Fed could
help to stimulate the economy, which has shown notable signs of
slowing since the middle of 2011.
Credit Suisse issued a note late last week highlighting that
even though the Fed is buying bonds in easing programs, owning a
portfolio of equities and bonds provides maximum risk-adjusted
returns during easing. As the above chart shows, the efficient
portfolio to hold during QE1 was purely stocks. During QE2, as
shown below, the portfolio eased to 40 percent stocks and 60
percent bonds. For a potential QE3, Credit Suisse suggests a higher
allocation to equities of about 50-60 percent.
Chairman Ben Bernanke's speech at the Jackson Hole economic
conference on August 31 could outline new easing policies. In the
2010 meeting he outlined QE2. Many expect that, if QE3 is imminent,
it will be discussed by the Chairman there. The conference will
precede the Fed's next meeting in mid-September.
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