At a Fed Conference, Views Differ Sharply on Stimulus’s Effect

Unconventional monetary policy “has been a significant success altogether,” Christine Lagarde, managing director of the International Monetary Fund, said in a lunchtime address. She said the efforts continued to yield benefits and should not be unwound too quickly.

Even for developing countries, which have sometimes criticized the efforts, the effects are “still positive,” she said. “Marginally, but still positive.”

But the conference, convened by the Federal Reserve Bank of Kansas City, underscored again the striking divide between academics, where skepticism is widespread about the benefits of the Fed’s asset purchases, and policy makers, where confidence is equally widespread.

The Fed has accumulated more than $3 trillion in Treasury securities and mortgage-backed securities, and since last December it has been expanding those holdings by $85 billion a month in an effort to drive down unemployment and promote growth.

The day began with a series of academic presentations criticizing the power of that approach. The most supportive said that the Fed’s purchases of Treasuries had little value, but that its purchases of mortgage-backed securities “likely have had beneficial macroeconomic effects.”

That study, by Arvind Krishnamurthy, an economist at Northwestern University, and Annette Vissing-Jorgensen, an economist at the University of California, Berkeley, still found little economic benefit in holding on to the mortgage bonds and Treasuries, a basic element of the Fed’s stimulus campaign. And it argued the Fed was undermining its own efforts by failing to articulate a clear plan for the purchases.

Policy makers tend to view these critiques as triumphs of theory over reality. They point to events in June as a kind of perverse evidence, noting that a wide range of interest rates jumped after the Fed’s chairman, Ben S. Bernanke, announced that the Fed intended to reduce its monthly asset purchases by the end of the year. The implication, they said, is that the purchases had been suppressing those rates.

“The paper doesn’t comport very well with the experience of the last couple of months,” said Donald L. Kohn, a fellow at the Brookings Institution and a former Fed vice chairman. “We’ve had a very broad set of asset price changes.”

Academic economists, in turn, say policy makers are claiming credit without presenting evidence.

While it seems clear, for example, that the Fed’s purchases of mortgage bonds have reduced interest rates on mortgage loans, some economists see evidence that current economic conditions have limited the benefits of lower mortgage rates. Banks have retained some of the benefit rather than passing it on to customers. Tighter qualification standards mean that many would-be borrowers cannot benefit from the lower rates. And those who are borrowing may not be inclined to spend more.

“Showing Fed affects interest rates doesn’t mean it automatically affects real activity,” one of those skeptics, Amir Sufi, an economist at the University of Chicago, said on Friday in an exchange of messages on Twitter. “Quantitative significance must be established.”

These debates, of course, are not merely academic. Fed officials are divided over when to begin cutting their monthly asset purchases — and when they do so, they must decide whether to buy fewer Treasuries, fewer mortgage bonds, or some combination.

Mr. Bernanke chose not to attend the conference as he prepares to step down in January, and no other Fed official spoke in his place.

Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, said on Friday that he would support a cut when the Fed’s policy-making committee meets in September as long as there was no particularly bad news between now and then.

“I would be supportive in September as long as the data that comes in between now and then basically confirm the path we’re on,” he told CNBC.

Mr. Lockhart, however, does not hold a vote on the Federal Open Market Committee this year. One official who does, James Bullard, the Federal Reserve Bank of St. Louis president, told CNBC in a separate interview that he was undecided. “I don’t think we have to be in any hurry in this situation,” he said. “Inflation is running low, you’ve got mixed data on the economy, so I’d be cautious. I wouldn’t want to prejudge the meeting.”

Policy makers from developing countries urged the Fed to clarify its plans so they can prepare for potential disruptions. Low interest rates in the developed world have sent vast quantities of money sloshing into those countries. Ms. Lagarde said that net flows to those countries had risen by $1.1 trillion since 2008, about $470 billion above expectations based on long-term trends.

As rates rise, history suggests that some of the money may come sloshing back, with hugely disruptive consequences.

Investors already are selling foreign currencies and buying dollars in the expectation that the Fed will begin to decelerate its stimulus campaign, allowing the dollar to strengthen. The Indian rupee lost 4 percent of its exchange value in about a week, prompting the Reserve Bank of India to impose restrictions last week on the outflow of money.

Agustín Carstens, governor of the Bank of Mexico, said, “Advanced country central banks should mind the spillover effects of their actions.” He added, “Otherwise the crisis will be reactivated with new actors.”

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The Practical Effect of the Arizona v. United States Decision

The Supreme Court?s recent decision on Arizona?s immigration law, SB 1070, otherwise known as the ?Support Our Law Enforcement and Safe Neighborhoods Act,? has done little to quell the attention and conversation that has been prevalent over the past two years since the law was passed. Critics of the legislation say it encourages racial profiling, while supporters say it is intended to reduce the number of illegal aliens in the state.

The Practical Effect of the Arizona v. United States Decision

The Supreme Court?s recent decision on Arizona?s immigration law, SB 1070, otherwise known as the ?Support Our Law Enforcement and Safe Neighborhoods Act,? has done little to quell the attention and conversation that has been prevalent over the past two years since the law was passed. Critics of the legislation say it encourages racial profiling, while supporters say it is intended to reduce the number of illegal aliens in the state.

The Practical Effect of the Arizona v. United States Decision

The Supreme Court?s recent decision on Arizona?s immigration law, SB 1070, otherwise known as the ?Support Our Law Enforcement and Safe Neighborhoods Act,? has done little to quell the attention and conversation that has been prevalent over the past two years since the law was passed. Critics of the legislation say it encourages racial profiling, while supporters say it is intended to reduce the number of illegal aliens in the state.

Debating the Election’s Cause and Effect on Wall Street

Some market participants who are generally supportive of Mr. Romney’s economic policies, including the influential strategist James Bianco, argue that his rise in some polls since the first presidential debate, on Oct. 3, has been a drag on the markets because of Mr. Romney’s opposition to the Federal Reserve’s efforts to aid the economy with monetary stimulus.

The market returns over the last two weeks provide some support for this minority view. Leading American stock indexes fell 1.5 percent in the seven days after Mr. Romney delivered his strong performance in the first debate and began to rise in some national and swing-state polls.

Tying the movement of the markets to one thing, like the election, is difficult and dangerous. And there is no shortage of other issues occupying investors these days, from China to the European debt crisis to American economic data. But the tightening of the race in the last two weeks has led to more talk about the influence the election is exerting on the markets, and vice versa. The results of the second debate on Tuesday, and its effect on the polls, will only increase the conversation.

Even strategists who don’t see Mr. Romney’s prospects influencing broad stock indexes say the candidates’ changing fortunes have hit asset prices in more subtle ways, in specific sectors that could be helped or hurt by a change of administration.

“By and large, white-collar finance people want to see Romney in there, but there are a number of subplots within that,” said Jack Ablin, the chief investment officer at Harris Private Bank.

Perhaps the sector that has seen its fortunes buoyed most clearly by the Oct. 3 debate is the coal industry, which won a mention from Mr. Romney onstage when he said: “I like coal. I’m going to make sure we’re going to be able to burn clean coal.”

The next day, coal companies in the Standard & Poor’s 500-stock index halted a slide that had lasted most of the year, and began to rise while the broader market was falling. Since then, coal stocks have been up as much as 20 percent, more than any of the 154 other sectors in the index.

Mr. Ablin said that along with other developments working against coal stocks, like the increased availability of natural gas, coal companies had been hurt by President Obama’s support for alternative energy sources. Now, he said, they are being helped by the perception that Mr. Romney “is really more fossil fuels.”

Traders have not suddenly concluded that Mr. Romney is a sure bet for the White House — most prediction models still give Mr. Obama better-than-even odds of winning. But few people are more attuned to the subtle movements of polls than the number crunchers on Wall Street.

On trading floors, there is constant discussion and occasional wagering on the changing odds of the election outcome on Intrade, the betting Web site. After the first debate, Mr. Obama’s odds of victory on the site fell from about 80 percent to about 60 percent last Friday.

Mr. Bianco, the strategist, said at an investment conference last week that the pessimism overtaking the market was a direct result of Mr. Romney’s success after the first debate. He argued that investors had been scared off by Mr. Romney’s promise not to reappoint the current Fed chairman, Ben S. Bernanke, when his term is up in 2014. Mr. Bianco, no fan of the Fed’s current policy, said the market had become addicted to the Fed’s stimulus and was frightened by the prospect of losing it.

“The further that Romney surges, the more you could see the market struggle,” he said in an interview.

Jared Dillian, the author of a popular investing newsletter, said he, too, thought Mr. Romney’s success was worrying investors. In addition to Fed policy, Mr. Dillian said, investors are concerned about the budget cuts that Mr. Romney has promised.

“You can pretty much point to exactly that debate and when the stock markets started acting poorly,” Mr. Dillian said.

The Practical Effect of the Arizona v. United States Decision

The Supreme Court?s recent decision on Arizona?s immigration law, SB 1070, otherwise known as the ?Support Our Law Enforcement and Safe Neighborhoods Act,? has done little to quell the attention and conversation that has been prevalent over the past two years since the law was passed. Critics of the legislation say it encourages racial profiling, while supporters say it is intended to reduce the number of illegal aliens in the state.

The Practical Effect of the Arizona v. United States Decision

The Supreme Court?s recent decision on Arizona?s immigration law, SB 1070, otherwise known as the ?Support Our Law Enforcement and Safe Neighborhoods Act,? has done little to quell the attention and conversation that has been prevalent over the past two years since the law was passed. Critics of the legislation say it encourages racial profiling, while supporters say it is intended to reduce the number of illegal aliens in the state.