Fed's Rosengren Calls for Open-Ended QE to "Boost Asset Prices"

The President of the Federal Reserve Bank of Eric Rosengren was interviewed on CNBC Tuesday morning and in that interview, advocates sizable asset purchases by the Fed to boost the fledgling U.S. economy. Rosengren is not a voting member of the Federal Open Market Committee, however he is an alternate member for both 2012 and 2013 and has some say in Fed policy.

In his interview, Rosengren advocated that the Fed increase its holdings of mortgage backed securities. By doing so, he believes that the Fed could help to bring down real borrowing costs for consumers and companies further and could also help to restore confidence in consumers. As Sarah Eisen of Bloomberg Surveillance pointed out Tuesday morning, real income growth is outpacing real consumption growth. Also, he advocated purchases in size with no limit on the total number, saying that the Fed's only limit of easing is the amount of bonds outstanding.

Restoring consumer confidence can be achieved through QE programs in two ways: first, by reflating asset prices and creating a wealth effect and second, by decreasing unemployment and hopefully cause further optimism in those searching for employment. By achieving both of those, the Fed could help to stimulate the economy, which has shown notable signs of slowing since the middle of 2011.

Credit Suisse issued a note late last week highlighting that, even though the Fed is buying bonds in easing programs, owning a portfolio of equities and bonds provides maximum risk adjusted returns during easing. As the above chart shows, the efficient portfolio to hold during QE1 was purely stocks. During QE2, as shown below, the portfolio eased to 40 percent stocks and 60 percent bonds. For QE3, they suggest a higher allocation to equities of about 50-60 percent.

Chairman Ben Bernanke's speech at the Jackson Hole economic conference on August 31 could outline new easing policies. It was at that meeting that he outlined QE2 in 2010 and many expect that, if QE3 is imminent, it will be discussed by the Chairman there. The summit is ahead of the Fed's next meeting in mid-September.