Jerome H Powell: Remarks on "Government Debt Management at the
Zero Lower Bound"
Speech by Mr Jerome H Powell, Member of the Board of Governors of the Federal Reserve
System, at the Panel Discussion on "Debt Management in an Era of Quantitative Easing:
What Should the Treasury and the Fed Do?", Washington, DC, 30 September 2014.
* * *
The views offered are mine alone and not necessarily those of my colleagues at the Federal Reserve.
Watch live at:
http://www.brookings.edu/events/2014/09/30-debt-management-quantitativeeasing-treasury-fed
Thank you for the opportunity to be here today. Given my role at the Federal Reserve, I am
not in a position to comment on debt management policy.
I would like to begin by complimenting the authors of this highly interesting paper for their
systematic approach to thinking about a wide-ranging and difficult set of issues.
After a period during which the Treasury's debt management needs dominated Federal
Reserve policies, the Fed began to regain its independence with the Treasury-Fed Accord of
1951. Since the 1970s, there has been little or no coordination between the two institutions
over debt management. This paper argues that the extraordinary response to the global
financial crisis brought about a conflict between debt management and monetary policy that
should have been avoided through collaboration. The paper proposes a regime in which the
Treasury and the Fed would cooperate around debt management at all times and would fully
collaborate in the case in which the monetary policy rate is pinned at the zero lower bound.
As a policymaker, I bring a degree of scepticism to a proposal to make major changes to
institutional arrangements that seem to me to have served the public well. I will mention three
areas where I have significant concerns. First, the literature on financial stability and
monetary policy is still in its infancy. There is no consensus that monetary policy (or debt
management policy) should assume the kinds of roles assigned by the authors. In particular,
policymakers are addressing the problem of private money creation through an array of
regulatory initiatives.
Second, in describing the costs of the existing arrangements, the paper estimates that the
Treasury's post-2008 extension of the weighted average maturity (or duration) of the Federal
debt offset - in a purely mechanical sense - about 35 percent of the effect of the Federal
Reserve's large-scale asset purchase (LSAP) programs on the level of 10-year Treasury
yields.1 I would challenge this ex post framing of the issue. Maturity extension merely
continued a policy begun by the Treasury well before the crisis and was also broadly
consistent with the Treasury's past behavior at times of substantial increases in borrowing.
My starting point would be that the Federal Open Market Committee did what it thought was
appropriate ex ante to return the economy to full employment and stable prices, taking
Treasury decisions concerning debt management as exogenous.
As the authors acknowledge, there are good reasons to think that any term premium effect of
the maturity extension must have been much smaller than the "35 percent" figure implies.
The paper's estimate is based solely on what is sometimes referred to as the "duration
removal" channel. There are other channels that would not be offset by maturity extension -
in particular, a channel by which the Federal Reserve signals the strength of its commitment
to achieving the dual mandate. My view is that it is quite difficult to explain the observed
effects of LSAPs on asset prices without reference to these other channels. In addition,
according to the authors' estimates, the "announcement effects" of the Treasury's maturity
extension policy seem to be only half the size of the effects of comparable Fed
announcements.
The LSAPs tripled the Federal Reserve's share of outstanding 10-year duration, from
12 percent to 36 percent, and had quite significant effects on the prices of financial assets.
By most estimates, the 10-year Treasury term premium was deeply negative from mid-2011
through mid-2013; it remains near zero today, far below normal pre-crisis levels. Given the
very low level of rates over this period, it is not clear to me that a slightly more negative term
premium would have produced materially different real economy results.
Third, the authors' proposals seem to me to be fraught with risk for the Federal Reserve. I
believe that the existing institutional arrangements have served the public well. The
independence of the Federal Reserve's monetary policy is highly valuable to society. There
is considerable evidence that monetary policy independence leads to better macroeconomic
outcomes. Any active collaboration between debt management and monetary policy, even in
a crisis, would risk calling into question that independence. That is a risk I would be very
reluctant to take.
The period after the Second World War during which debt management imposed
requirements upon monetary policy was marked by strains between the Treasury and the
Fed and less than full independence for monetary policy. While current institutional
arrangements may be imperfect, history suggests a need for caution before allowing these
two policies to become entangled once again.
Thanks again, and I look forward to our conversation.