Federal Reserve Governor Donald Kohn said the central bank’s decision to reinvest proceeds from maturing mortgage-backed securities won’t necessarily lead to additional stimulus.
“Certainly there’s nothing automatic leading from that to further quantitative easing,” Kohn said in an interview today on CNBC, referring to large-scale purchases of securities.
“It’s not a signal of something to come. It is a signal that the outlook is not as good as it was in the spring.”
Kohn’s comments echoed minutes of the Fed’s Aug. 10 meeting released Tuesday signaling easier monetary policy was no sure thing. Some policy makers were concerned investors would misinterpret the decision to put a floor on securities holdings as an indication the Fed intended to resume its program of asset purchases, the report said.
The minutes didn’t indicate what development would prod the Fed to take further action at its Sept. 21 meeting with unemployment near a 26-year high.
The Fed decided last month to keep its securities holdings at $2.05 trillion by reinvesting the proceeds from maturing mortgage-backed bonds into Treasuries.
If the economy deteriorates, the central bank isn’t out of ammunition to increase stimulus and could do so by buying additional securities, reducing the interest rate on excess reserves or changing the language in its communications, Kohn said.
“We’re not out of tools,” Kohn said. “Lowering interest rates will hopefully not only reduce the cost of capital for businesses, but it would bolster asset prices, equity prices, housing prices.”
Fed Chairman Ben Bernanke said last week that the Fed “will do all that it can” to sustain the economic recovery, adding that more securities purchases by the central bank may be warranted if growth slows.
“The chairman covered these options at Jackson Hole,” Kohn said. “How effective is one of the uncertainties he pointed to.”
Kohn is retiring from the central bank after a 40-year career, and today is his last day at the Fed, central bank spokesman David Skidmore said. Kohn will join the Washington- based Brookings Institution, a public policy research group, in mid-September, a person briefed on the move said last month.
The Federal Open Market Committee, seeking to spur economic growth, last month held the main interest rate unchanged at zero to 0.25 percent, where it’s been since December 2008, and affirmed a pledge to keep rates low for “an extended period.”
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