Highlights of speeches by Michelle Baumann, Loretta Mester and Isabelle Schnabel.

Isabel Schnabel:

The European Central Bank should use quantitative easing programs primarily in times of crisis because their costs can be more pronounced than other tools in its repertoire, according to Executive Board member Isabelle Schnabel. “Asset purchases can be a powerful tool when financial markets are in turmoil,” she said in a speech in Tokyo on Tuesday. “Outside these periods, however, central banks must carefully assess whether the benefits of asset purchases outweigh the costs.”
The ECB began large-scale asset purchases in 2015 in an attempt to revive inflation, which had become too sluggish. A separate program was later launched during the Covid-19 pandemic. Holdings peaked at around €5 trillion, consisting mostly of government debt. ECB officials recently agreed on a new framework for how to conduct policy going forward, largely preserving the current system for managing interest rates. At the same time, they are trying to give banks more of a say in how much liquidity they need to operate. This is understood to include a new “structural” bond portfolio, although the details are yet to be finalised.
Schnabel said that while more research is needed, “two main lessons can be drawn at this stage”: “Central banks may face shocks in the future when the optimal policy response requires a more patient approach to achieving their objective for inflation near the effective lower bound, especially after balance sheet crises.” “Central banks can reduce the cost of asset purchases by using them in a more targeted and parsimonious manner. Examples of this are the ECB’s commercial paper purchases in 2020 and the Bank of England’s interventions during the LDI crisis.” She also said that “in a bank-based economy like the euro area, other measures such as targeted long-term refinancing operations can provide significant support to the economy.

Michelle Bauman:

Speaking on a panel, Federal Reserve Governor Michelle Bowman focused in her prepared remarks on the Federal Reserve’s balance sheet, which has been tapering “relatively smoothly,” she said. Federal Reserve officials will slow the pace at which they reduce the balance sheet starting next month, and have said they intend to stop when the level of bank reserves is just above what they consider sufficient. “In my view, we haven’t reached that point yet,” Bowman said, adding that she would support waiting to slow the pace of asset outflows or applying a more moderate delay. “In my view, it is important that we continue to reduce the size of the balance sheet to reach sufficient reserves as soon as possible and while the economy is still strong,” she said. “This will allow the Federal Reserve to use its balance sheet more effectively and reliably to respond to future economic and financial shocks.”

Loretta Mester:

Cleveland Federal Reserve Bank President Loretta Mester said the U.S. central bank should consider ways to better communicate to the public how economic conditions will affect future policy decisions. Speaking in Tokyo on Tuesday, Mester recommended two key changes: — adding more information to the Fed’s post-meeting policy statement — to describe how officials assess economic developments and potential risks — more detail to policymakers’ quarterly summary of economic forecasts.
“Improvements in communication would make monetary policy more effective in normal times and also improve the effectiveness of unconventional policy tools, such as forward guidance, in emergency times,” she told a conference hosted by the Bank of Japan. She also said she expects officials to look at the communications issue as part of a five-year review of their policy framework, due to begin in late 2024. She did not comment on the outlook for the economy or interest rates. Mester said increasingly brief political statements, while often seen as a virtue, can also be problematic as each word takes on additional meaning. They can also make it difficult for the public to see the connection between economic development and policy decisions. Mester also said that scenario analysis — or describing how different scenarios would lead to different policy actions — should also be a standard part of the Fed’s communications. “This can be particularly useful in periods like today when the fundamental structural elements of the economy may have changed,” she said. The Federal Reserve should also consider releasing an anonymous report linking officials’ forecasts of interest rates — often called a “dot plot” — to their forecasts of growth, unemployment and inflation in their Summary of Economic Projections, Mester said. Mester will step down from her role as president of the Cleveland Federal Reserve in June when her term expires.