Fed, BOE Stimulus Exits May Differ on Bond Analysis, BIS Says

By Jennifer Ryan

Sept. 14 (Bloomberg) -- The Federal Reserve and other central banks may adopt different strategies for ending monetary stimulus because they have diverging views on the role of bond purchases in stoking economic growth, the Bank for International Settlements said.

The Fed’s statements suggest it considers buying assets as a stimulus, while the Bank of England view may be that holding onto the bonds also aids the economy, BIS official Robert McCauley wrote in a report released yesterday in Basel, Switzerland.

The analysis suggests the Fed regards interest-rate increases as being enough to unwind stimulus without bond sales, while the Bank of England may want to raise rates and sell assets concurrently. Both banks have amassed billions of dollars in debt holdings after they cut interest rates close to zero to battle the global recession.

In the U.K. central bank’s view, “to raise the short-term interest rate while never selling the bond holdings would be to tap the brake while the other foot remained firmly on the accelerator,” McCauley said. For the Fed, “without a foot on the accelerator, one could consistently tap the brake.”

The BIS, the bank for central banks, published the report as part of its quarterly review of the world economy.

The Fed last month discussed ending its program of buying $1.25 trillion agency mortgage-backed securities and $200 billion of housing agency debt, though it said rates would stay “exceptionally low” for an “extended period,” minutes of its Aug 11-12 meeting showed. The interest rate is now in a range of zero to 0.25 percent.

Fed Strategy

The U.S. central bank has signaled it may not raise rates first, and instead may adopt actions such as providing short- term repurchase agreements against long-term securities, McCauley wrote.

The Bank of England on Sept. 10 reiterated its program to buy 175 billion pounds ($292 billion) of bonds with newly created money as it kept the benchmark rate at 0.5 percent.

Deputy Governor Charles Bean signaled last month that the U.K. central bank will probably use a combination of interest- rate increases and asset sales in withdrawing stimulus.

“The fact that we can raise bank rate means that we can stagger sales back to the private sector in a way that recognizes market conditions at the time,” he told journalists in London. Prospects for inflation will be the “guiding light” that determines the timing of any withdrawal, he said.

The Swiss National Bank, which has been pursuing a policy of holding down the Swiss franc by buying foreign assets, has offered little guidance on how it will exit this strategy, McCauley said.

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net