NEW YORK Two top Federal Reserve officials offered a fresh defence of the U.S. central bank's asset-buying program on Friday, arguing that it helps the nation's fiscal health by boosting the economy.
The comments from Boston Federal Reserve Bank President Eric Rosengren and Fed Governor Jerome Powell amounted to an effort to inoculate the central bank against political pressures that might mount if it faces losses on its massive bond portfolio when interest rates finally rise.
Both officials pointed to increased economic output and the related rise in tax revenues as two benefits of the central bank's policy of buying $85 billion (55.7 billion pounds) in bonds per month.
"We do well to ... consider these benefits, and the costs of inaction, when evaluating policy," Rosengren, who is considered one of the more dovish Fed officials, said at a conference hosted by the University of Chicago's Booth School of Business.
The Fed has said it would keep purchasing assets until the outlook for the labour market improved substantially, although minutes from the central bank's January policy meeting released on Wednesday showed some officials thought they might have to stop short of that goal due to risks the policy presents.
Most officials have focused on the possibility of asset price bubbles and future inflation, or the potential for roiling markets when the time comes to shrink the Fed's balance sheet, which has tripled since 2008 to around $3 trillion.
Bloomberg, citing anonymous sources, reported on Friday that Fed Chairman Ben Bernanke had played down concerns that monetary policy was fuelling asset bubbles at a private meeting with U.S. bankers earlier this month.
But the prospect of political blowback if the Fed loses money on its bonds also troubles officials, particularly since any losses would likely come when the central bank is raising the interest rate it pays commercial banks to park their excess reserves at the Fed.
The central bank plans to jack up that rate when it comes time to withdraw money from the economy to make sure it does not overheat.
"We're going to pay interest on reserves to large banks in the U.S., and to foreign banks, to the tune of tens of billions of dollars, at a time when we're not going to pay anything back to the U.S. Treasury," St. Louis Fed President James Bullard said from the audience at the conference.
"That sounds like a recipe for political problems."
PAYING THE PRICE
The central bank returns portfolio profits to the Treasury each year and it has never missed a payment before. Last year, remittances hit a record $89 billion thanks to its bloated balance sheet.
The Congressional Budget Office estimates it will contribute some $95 billion a year to federal coffers through 2016. But remittances are expected to hit zero from 2018 through 2020, before resuming in 2021.
"We are in a period where the attacks on the Federal Reserve are the worst I have seen," former Fed Governor Frederic Mishkin said during a panel at the conference. "This issue is going to come up big time in Congress."
Powell, in his first public remarks since joining the central bank's board last May, acknowledged the Fed could come under public and political criticism, but said any losses needed to be put in a broader context.
"Any temporary losses should be weighed against the expected social benefits of the increased economic growth generated by the (bond buying), which would include higher tax revenue from increased output," he said.
In his remarks Rosengren, who along with Bullard and Powell backed the Fed's bond buying plan in a vote last month, said the program helps the nation lower its debt-to-GDP ratio by reducing the interest rate the government pays bond holders.
It also reduces government spending in areas such as unemployment insurance because it reduces joblessness, he said.
Bullard, considered an inflation hawk, has expressed caution about expanding the central bank's balance sheet too far.
On Friday, he acknowledged more voices within the Fed are pressing to scale back bond buying. "The idea of tapering the program at some point in the future may be gaining some steam on the committee," he said on CNBC television.
But he added: "Fed policy is very easy and it's going to stay easy for a long time."