Bill English on the Effectiveness of QE and the Consequences of Fed Losses

Episode Summary

Executive Summary: Bill English reflects on his Fed career, the evolution of FOMC communication and frameworks, and today’s inflation fight. He argues the Fed is rightly prioritizing inflation risk, while also explaining why QE can matter, why Fed losses are possible but usually not policy-threatening, and why political optics—not solvency—are the main concern.

Main Topics: Bill English’s Fed career and policy work (Priority: 5/5): English describes rising through the Monetary Affairs division, working on FOMC briefings, statements, minutes, and normalization planning during the post-crisis era. Fed framework debates and inflation targeting (Priority: 5/5): He discusses the 2012 adoption of a 2% inflation target, debates over price-level targeting, and why the later FAIT framework created confusion about symmetry. Communication, the taper tantrum, and market misunderstanding (Priority: 4/5): English explains how FOMC communication can move markets and recalls frustration after the 2013 taper tantrum when the Fed’s intentions were misread as hawkish. Current inflation and the Fed’s tightening stance (Priority: 5/5): The conversation covers the September FOMC meeting, Powell’s Volcker-like resolve, and why the Fed now sees inflation as the dominant risk, even at recession risk. Global central banks and supply shocks (Priority: 4/5): They compare the Fed’s tightening to ECB, BoE, SNB, and others, emphasizing the difficulty of responding to supply-driven inflation without damaging growth or credibility. QE, QT, and central bank balance sheet losses (Priority: 5/5): English argues QE can work through signaling, market-functioning, and portfolio-balance channels, and explains how rising rates can generate Fed net income losses and deferred assets. Political and institutional implications of Fed losses (Priority: 5/5): He stresses that losses would not stop policy implementation, but they could create political problems by reducing remittances and drawing scrutiny over payments to banks and money funds.

Key Arguments: The Fed’s Monetary Affairs job is deeply policy-relevant, not just academic, involving briefing the Board and FOMC, drafting statements, and preparing minutes that shape public understanding. The 2012 inflation-targeting framework had to balance clarity on a 2% inflation objective with a commitment to employment, which is why the SEP was used to express a rough labor-market benchmark. FAIT was intentionally asymmetric and tied to shortfalls from 2% at the zero lower bound; it was not a symmetric price-level target, though some market participants initially misread it. The Fed’s current posture is a rational response to unusually high uncertainty from the pandemic, fiscal expansion, and the Ukraine war; the balance of risks shifted from weak growth to persistent inflation. Powell’s rhetoric is meant to anchor expectations and prevent inflation from becoming entrenched in wages and prices, even if it raises recession odds. Other central banks are tightening because supply shocks can become persistent inflation and damage credibility, even when the initial source is not excess demand. QE likely matters through at least three channels: signaling future policy paths, supporting market functioning in stressed markets, and portfolio balance effects on yields. QT is still tightening, but probably less powerful than QE because it lacks the same degree of signaling and market-functioning effects. Fed losses arise because interest expense on reserves and reverse repos rises immediately when policy rates rise, while yields on the Fed’s securities adjust only gradually. A Fed loss creates a deferred asset and suspends remittances to Treasury until future income offsets the loss; this does not imply insolvency or an inability to conduct monetary policy. The main risk from losses is political: reduced remittances and visible payments to banks/money funds could undermine public and congressional support for Fed independence. QE should be assessed in general equilibrium: even if the Fed books accounting losses, the Treasury may still benefit from lower borrowing costs, stronger GDP, and higher tax revenues. English expects real rates to stay structurally low over time because demographics and productivity trends have not changed meaningfully, even though nominal rates may fall once inflation returns to target.

Data Points: Years at Monetary Affairs: 1992–2015 - English’s tenure at the Fed’s Division of Monetary Affairs Special Advisor tenure: 2015–2017 - English’s later role at the Fed Board Division size growth: about 60–70 to about 140 staff - Monetary Affairs expanded during and after the financial crisis Director tenure: 2010–2015 - English served as Monetary Affairs director during major crisis-era policy debates FOMC rate hike: 75 basis points - September FOMC meeting discussed as the third consecutive hike of that size Inflation target: 2% - Core benchmark adopted in the Fed’s longer-run goals statement Fed balance sheet securities holdings: about $8.5 trillion - Approximate size of securities on the Fed’s asset side during the discussion Fed remittances to Treasury: $50–100 billion - Typical scale of annual transfers in recent years, according to the discussion Fed remittance record: $109 billion - Highest remittance mentioned, in the prior year Unrealized loss cited: $850 billion - Approximate mark-to-market loss referenced from the Fed’s quarterly balance sheet report Current unemployment rate: 3.7% - Used as the baseline in discussing the SEP’s expected labor-market deterioration Projected unemployment rate: 4.4% - SEP projection mentioned as a likely increase Projected unemployment rate (approx.): close to 4.5% - Alternative rounding of the SEP projection in the discussion Rate outlook in SEP: real fed funds rate around 0.5% by 2025; nominal around 2.5% - Used to illustrate expectation that rates eventually fall back

Pivotal Quotes: "we will keep at it" — David Beckworth / referencing Powell and Volcker: Used to connect Powell’s Jackson Hole and press conference language with Volcker’s memoir title "I really did feel at that point, like I wanted to go and talk to some market participants and just say, give me a break." — Bill English: His reaction to the 2013 taper tantrum and market overreaction to Fed communications "the best way to address this is to talk about it and be clear about it and try to do that kind of in advance" — Bill English: On how the Fed should handle possible balance-sheet losses and political scrutiny

Implications: The episode suggests the Fed can endure accounting losses without losing policy capacity, but it must manage communication carefully. For markets and policymakers, the bigger danger is political backlash and credibility loss if Fed actions are misunderstood or surprise Congress.