The Federal Reserve should concentrate on purchasing mortgage assets and unload Treasury bonds, according to a study released Friday.
Reuters reports that the study, presented at the Kansas City Fed’s Jackson Hole conference and released Friday, controversially argues that Treasury bond buys have been ineffective.
The paper’s authors, Arvind Krishnamurthy of Northwestern University and Annette Vissing-Jorgensen of Berkeley, argue that the vague definition as to the goal of asset purchases has largely neutralized their effectiveness, Reuters reports.
“Without such a framework, investors do not know the conditions under which (asset buys) will occur or be unwound, which undercuts the efficacy of policy targeted at long-term asset values,” Krishnamurthy and Vissing-Jorgensen wrote.
The report contends that the impact of asset buying is not as broad as the Fed contends. “It does not, as the Fed proposes, work through broad channels such as affecting the term premium on all long-term bonds,” the authors wrote.
Instead, Krishnamurthy and Vissing-Jorgensen argue that buying mortgages has been a more effective strategy. By buying mortgages, they claim, the Fed has created a scarcity in the mortgage market, leading both prices and the availability of credit to rise.
According to Reuters, minutes from the Fed’s July meeting indicate that a similar policy has already been considered, but dismissed – at least for now.
“The Committee also considered whether to add more information concerning the contingent outlook for asset purchases to the policy statement, but judged that doing so might prompt an unwarranted shift in market expectations regarding asset purchases,” the minutes said.