A paper by four Harvard scholars, who argue that the impact of the Federal Reserve’s purchases of long-term debt securities in its quantitative easing program was diluted by the Treasury’s strategy of lengthening the maturity of their debt issuance, sparked a lively conversation at the Hutchins Center on Fiscal and Monetary Policy this week.
Responding to the paper written by Harvard’s Robin Greenwood, Sam Hanson, Josh Rudolph and Larry Summers were Lou Crandall of Wrightson ICAP; Jason Cummins of Brevan Howard; Federal Reserve Board member Jerome Powell and Mary John Miller, who until recently served as Under Secretary of the Treasury for Domestic Finance.
You can watch a video of the whole event on YouTube, but if you don’t have time for that, here are three takeaways.
Federal Reserve Independence. The authors’ call for greater coordination between the Federal Reserve and Treasury was hotly contested by the panel. Cummins remarked that complete Federal Reserve independence is vital to its inflation-fighting credibility. Miller pointed to the practical difficulties of sticking to a year-long agreement, as advocated by the authors, namely the unpredictability of the government’s financing needs and the institutions’ differing goals. She added that that “coordination is a bridge too far, but strong communication is key.” Summers responded that the Federal Reserve and Treasury have worked together in the past while preserving the Fed’s independence, citing the introduction of the inflation-indexed bond in 1997.
Regular and Predictable. Cummins commented that regular and predictable government debt issuance is essential for preserving the Treasury security’s status as a risk-free benchmark. Miller pointed out that altering course during a time of great economic instability would have introduced uncertainty in the market. Summers disagreed. He questioned whether overall debt management policy was “regular and predictable” from the perspective of the marketplace, when consistent Treasury policies were paired with unpredictable Federal Reserve actions.
Private Demand for Safe Assets. New rules that require banks to hold more high quality liquid assets will increase their demand for short-term safe assets. Crandall warned that if the Federal Reserve and Treasury do not provide a robust supply of such assets, the private sector will, with a cost to overall financial stability. He also noted that, as the Federal Reserve’s balance sheet starts to shrink, investor demand for safe assets may require the Treasury to make up the balance. To this point, Miller noted that the Treasury’s newest debt instrument, the floating rate note, meets investor demand for safe assets while achieving the Treasury’s other debt management goals.