Two Federal Reserve economists are telling the Street what it already suspected: Dovish talk may be even more powerful than quantitative easing.
In a research note, the economists wrote that the Federal Reserve's asset purchases, or quantitative easing, probably provided a "modest boost to economic growth and inflation." However, the effects of QE would depend in large part on the Fed's interest-rate guidance, the note said.
"[E]stimates from a macroeconomic model suggest that such interest- rate forward guidance probably has greater effects than signals about the amount of assets purchased," the economists wrote in the paper, released by the San Francisco Federal Reserve.
The paper, which was not an official Fed policy statement, was by Vasco Curdia, a senior economist at the Economic Research Dept. of the San Francisco Fed and Andrea Ferrero, a senior economist at the New York Fed. It landed during a relative news void Monday, and as many traders wonder when the Fed will begin tapering its asset purchases. Therefore, it quickly became a topic du jour among the trading community, and some read it as a document in support of tapering.
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"Everybody's focused on the ending of the asset purchases, leaving aside the forward guidance and what the research has continued to support from the Fed's point of view—the promise to keep rates low is as effective, if not more effective, than the outright purchase of assets," said Daniel Greenhaus, global market strategist at BTIG.
This summer as talk of the Fed "tapering" its $85 billion a month in bond purchases picked up, Fed officials were careful to emphasize that they had no intention of raising short-term interest rates anytime soon.