A third round of quantitative easing made good sense, according to Jeremy Stein, the Federal Reserve‘s newest governor.
Stein made his comments in a speech Thursday to the Brookings Institution in Washington, D.C. He was commenting on Fed Chairman Ben Bernanke’s decision in September to launch another round of quantitative easing.
“It appears that the economy is growing at a pace such that, absent policy action, progress on reducing unemployment will likely be slow for some time,” Stein said, calling the current unemployment rate of 7.8% “painfully high.”
Inflation, he said, “is subdued, running at or below our long-run objective of 2%.”
Stein said the additional stimulus was needed to boost a slow-growing economy.
“The complication, of course, is that the federal funds rate is essentially at its lower bound, which means that we cannot do more simply by turning that dial further,” Stein said. Instead, the Fed needs to use unconventional tools, such as large-scale asset purchases and guidance about the future path of the federal funds rate, he said.
Large-scale asset purchases helped bring the economy back from the brink in 2009, Stein said. Future LSAPs, however, may have marginal returns, he cautioned.
“A number of observers have raised concerns about diminishing returns, or escalating costs. I think that, at least in the limit, these concerns must be right; we could in principle push this tool to the point that the hurdle for additional usage would become very high. As policymakers, it is our responsibility to be as clear as possible about the nature of the costs and benefits, and how they might evolve,” Stein said.
Still, the Fed governor said he believes the recently announced policy of mortgage-backed securities purchases is a positive step.
“I am hopeful that these actions by the Federal Reserve will help to give economic growth a much needed boost. At the same time, I am keenly aware of the many uncertainties we still have about the workings of nonconventional policies,” he said, noting large-scale asset purchases in particular.