FELDSTEIN: The Federal Reserve Has Embarked On A Very Dangerous Strategy

martin feldstein

Harvard economics professor Martin Feldstein goes after the Federal Reserve and its new asset-buying strategy in an op-ed for the Financial Times.

“The Federal Reserve has now embarked on a very dangerous strategy, buying $40bn of mortgage-backed securities each month for an indefinite number of years,” he writes.

Like many critics of the Fed, Feldstein argues that this is the path to inflation and bubbles.

Furthermore, he argues that the strategy generally misses the underlying conditions holding back growth:

Under current conditions, the Fed’s new policy is not likely to strengthen the economic recovery. Mortgage rates are at record lows and home sales are already up sharply. Other potential homebuyers are blocked by tough credit standards (that is, by the need for a high credit score) rather than the level of mortgage rates. Lower mortgage rates may spill over to reduce rates on corporate debt but large businesses with enormous cash balances are reluctant to invest and to hire because they fear future tax increases. Many small businesses, which depend on local banks, are unable to secure credit because their banks lack the capital needed to increase lending.

He also notes that the benefits of QE-type programs are diminishing:

Although that worked in the fourth quarter of 2010 after the last round of quantitative easing, its favourable effect on gross domestic product only lasted for one quarter, followed by an annual growth rate of less than 0.5 per cent in the first quarter of 2011. The danger now is that an economic downturn or a rise in interest rates to normal levels could cause share prices to decline sharply.

Read the whole piece at FT.com.

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