The Federal Reserve should concentrate its unconventional monetary stimulus on mortgage asset purchases, according to a new study released on Friday, ditching Treasury bond buys which the authors say have not had much of an effect.
Presented at the Kansas City Fed's annual Jackson Hole conference, the paper argues rather controversially that the central bank should begin its exit strategy by selling Treasuries, something that is hard to conceive given the recent speedy selloff in government bonds.
The authors of the study say that the absence of concrete guidance as to the goal of asset purchases—vaguely defined as aimed toward substantial improvement in the outlook for the labor market—neutralizes their impact and complicates an eventual exit. The paper's authors are Arvind Krishnamurthy of Northwestern University and Annette Vissing-Jorgensen of University of California, Berkeley.
"Without such a framework, investors do not know the conditions under which (asset buys) will occur or be unwound, which undercuts the efficacy of policy targeted at long-term asset values," the authors write.
(Read more: Why tapering talk may be a 'temporary sideshow')
Minutes from the Fed's July meeting, released on Wednesday, suggested policymakers had already considered such a step but, for now, decided against it.
"The Committee also considered whether to add more information concerning the contingent outlook for asset purchases to the policy statement, but judged that doing so might prompt an unwarranted shift in market expectations regarding asset purchases," the minutes said.
The authors of the study say the effects of the U.S. central bank's asset purchases, which began after the Fed had already brought official interest rates down in late 2008, are much narrower than policymakers' had foreseen.
Predictably, current and former Fed officials took issue with the findings. James Bullard, president of the St. Louis Fed, said the authors' focus on market impact immediately following policy announcements was misleading.
"I just wanted to push back against this conclusion that you get an effect in one single market and then there's not that much (impact) over a variety of assets," Bullard said.