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Fed’s Stein Sees Diminishing Returns From Treasury Buying

November 30, 2012

Federal Reserve Governor Jeremy Stein said there may be “diminishing returns” from additional purchases of Treasury securities because companies may respond to lower borrowing costs by refinancing debt or returning money to shareholders instead of making business investments.

If “corporate investment reacts only weakly to further changes in term premiums, there may be more ‘kick’ to be had by focusing efforts on a sector that is more responsive,” Stein said today in a speech at the Federal Reserve Bank of Boston. “Mortgage purchases may confer more macroeconomic stimulus dollar-for-dollar than Treasury purchases.”

U.S. central bankers are weighing whether to expand their record stimulus to offset the scheduled expiration next month of Operation Twist, a program that swaps short-term Treasuries for longer-term debt. A “number” of Fed officials said at their policy meeting last month that the Fed next year may need to expand its monthly purchases of bonds, according to the minutes of the Federal Open Market Committee’s Oct. 23-24 gathering.

The Fed is buying $40 billion in mortgage debt each month under its third round of so-called quantitative easing and has pledged to keep its benchmark interest rate near zero at least through mid-2015 to boost growth. Policy makers haven’t set a limit on the duration or size of their latest asset-purchase program, which was announced in September.

Supports Purchases

Speaking on a panel with Minneapolis Fed President Narayana Kocherlakota, Stein said the central bank’s so-called Maturity Extension Program has put “upward pressure” on short-term interest rates.

Interest-rate risk is “clearly” one of the risks of expanding the central bank’s balance sheet, Stein said. Rising interest rates will curtail the Fed’s income, he said.

Policy makers could still purchase assets as a policy tool even when short-term rates have returned to a more normal level, he said.

“A Fed that goes back to a balance sheet of all Treasuries of just different maturities has the scope to alter the maturity of the Treasury portfolio and some MEP-like things,” he said.

Stein said he supports the FOMC’s latest bond-buying program and “its plan to continue with asset purchases” if the outlook for the labor market warrants more stimulus. An additional $500 billion of Treasury purchases may reduce Treasury and corporate-bond interest rates by about 0.15 percentage point to 0.2 percentage point, Stein said.

Similar Comments

Stein’s remarks were similar to those delivered Oct. 11 in Washington.

Stocks erased losses in the final 15 minutes as investors weighed development in Washington’s budget negotiations. The Standard & Poor’s 500 Index was little changed at 1,416.18.

Federal Reserve Bank of New York President William C. Dudley said yesterday in New York that he is focusing on “unacceptably high” joblessness as he considers whether the central bank should buy Treasuries into 2013. The Fed will “stay the course” in trying to achieve its economic goals, he said. Unemployment was 7.9 percent in October.

Buying mortgage-backed securities has had a “different effect” on credit markets than Treasury purchases, as evidenced by the reaction to the Fed’s September announcement of QE3, Stein said.

“While nominal long-term Treasury yields were roughly unchanged on the day of the announcement, yields on MBS fell dramatically,” Stein said. “Moreover, although the pass- through to primary mortgage rates has been more gradual, it too has been significant to date.”

The latest steps have succeeded in making home mortgages less expensive, with the average fixed rate offered on new 30- year loans at 3.41 percent yesterday, down from 3.57 percent on Sept. 12, the day before the FOMC announced its third round of quantitative easing, according to data.

To contact the reporter on this story: Caroline Salas Gage in New York at

To contact the editor responsible for this story: Chris Wellisz at

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