Fed's cues on rates more critical than bond buys: Fed study

Mon Aug 12, 2013 1:44pm EDT
 
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By Ann Saphir

SAN FRANCISCO (Reuters) - For investors trying to pinpoint when the Federal Reserve will likely end its massive bond-buying program, the message from researchers at a pair of influential regional Fed banks was clear: don't bother.

More crucial in terms of monetary policy's impact on U.S. growth and inflation will be signals from the U.S. central bank on when it will start to raise short-term interest rates from their current near-zero level, economists at the San Francisco Fed and the New York Fed wrote in the latest issue of the San Francisco Fed's Economic Letter published on Monday.

The Fed's bond-buying programs have given a moderate boost to the economy, but they would have far less impact without the Fed's simultaneous promise to keep rates low, they showed.

The finding, they said, goes not only for past rounds of quantitative easing, but also for the Fed's current and third round, known as QE3.

"Our analysis suggests that communication about when the Fed will begin to raise the federal funds rate from its near-zero level will be more important than signals about the precise timing of the end of QE3," San Francisco Fed senior economist Vasco Curdia and New York Fed senior economist Andrea Ferrero wrote.

Bond yields surged and stocks tanked in June after Fed Chairman Ben Bernanke said the central bank could begin to pare back its $85 billion in monthly asset purchases later this year, ending in the middle of next year when the unemployment rate is likely to be around 7 percent.

Investors were apparently taken by surprise that the central bank intended to wean markets of its program so soon, Fed officials have since said, expressing their own surprise at the strength of the reaction.

Policymakers have since moved, with some success, to tamp down the view that reducing the bond-buying does not bring the Fed near to raising rates.   Continued...

 
Federal Reserve Board Chairman Ben Bernanke testifies before a Senate Banking, Housing and Urban Affairs Committee hearing on "The Semiannual Monetary Policy Report to the Congress" on Capitol Hill in Washington July 18, 2013. REUTERS/Kevin Lamarque