Federal Reserve policy makers are likely to embark on a third round of large-scale asset purchases, moving “more decisively” to secure the US recovery, Harvard University economist Ken Rogoff says.
“They certainly should do something right away,” said Rogoff, a former International Monetary Fund chief economist who attended graduate school with Fed chairman Ben Bernanke. It’s “hard to know” if Mr Bernanke would immediately be able to gain the support of Federal Open Market Committee members, Mr Rogoff said in an interview today on Bloomberg Television.
The FOMC meets later today in Washington a day after the worst day for US stocks since December 2008. Bernanke last month outlined policy options including additional asset purchases or strengthening the commitment to low interest rates after the first two rounds of so-called quantitative easing failed to keep the unemployment rate below 9 per cent.
“Out-of-the-box policies are called for, especially much more aggressive monetary policy, however unpopular that may be,” said Mr Rogoff, a former Fed economist who like Mr Bernanke earned a PhD from the Massachusetts Institute of Technology. The Fed is “going to move more decisively,” Mr Rogoff said.
The Fed is scheduled to release a statement after its meeting, early tomorrow morning Sydney time. Mr Bernanke and his colleagues may prolong a pledge to maintain record monetary stimulus, said economists at JPMorgan Chase, BNP Paribas and Goldman Sachs.
The Fed could do so by making a commitment to hold its $US2.87 trillion balance sheet steady for an “extended period.” The central bank has kept its benchmark rate near zero since 2008.
‘Moderate inflation’
Mr Rogoff recommended the Fed say in “very clear statements” that it’s trying to create “moderate inflation.” “In the classic classroom QE, it’s open-ended,” Mr Rogoff said. “You say, ‘I’m trying to create inflation of, let’s say 2 or 3 per cent, and I’m going to do whatever it takes.’”
The Fed should also avoid repeating that officials are trying to boost stocks, Mr Rogoff said, calling that a “bad idea.”
The Fed should have extended its asset-purchase program, “as controversial as it was,” instead of ending it, Mr Rogoff said. The central bank completed the second round of bond buying in June, purchasing $US600 billion of Treasuries.
“They need to move much more decisively,” Mr Rogoff said.
Carmen Reinhart and Mr Rogoff wrote a 2009 book on the history of financial crises, “This Time Is Different,” a work Mr Bernanke said in April was “very informative.”
Bloomberg