As the Federal Reserve seems poised to initiate a new round of quantitative easing when it convenes next month, there is disagreement among the district branch leaders. Fed economists, and presidents in several cities, believe that buying more of our own debt and printing more money will do nothing to spur the desired healthy rate of inflation, or to treat the underlying structural causes of economic crisis, such as unemployment. See the following article from HousingWire for more on this.
An economist at the Federal Reserve Bank of St. Louis wonders if additional large-scale securities purchases by the Fed will produce the desired effects of driving down interest rates, boosting employment, and preventing deflation.
As the Federal Open Market Committee prepares to convene Nov. 2 and 3, some Fed officials believe a decision to increase the level of purchases, know as quantitative easing, is all but a foregone conclusion. While other officials at Fed districts across the country think the effects of such a policy will be muted because the benefits don’t outweigh the costs, and the markets are functioning much better than they have in a few years.
Daniel Thornton, vice president and economic adviser at the St. Louis Fed, said another concern of increased quantitative easing is that banks will simply hold onto the funds rather than boosting lending.
“It is possible – perhaps even likely – that almost all of any increase in the supply of credit associated with QE2 simply would be held by banks as excess reserves,” Thornton said. “If so, the effect of QE2 on interest rates could be small and limited to an announcement effect – the effect associated with the FOMC’s announcement – independent of the effect of the FOMC’s actions on the credit supply.”
He said this lack of an increase in the money supply will result in no increase in inflation. Thornton also said there is little monetary policy can do about structural unemployment and the mismatch of the skills of the jobless and the needs of employers, echoing a sentiment Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, discussed in August.
Also as stake is the Fed’s credibility. Charles Plosser, president of the Federal Reserve Bank of Philadelphia, has said recently that an ineffective QE2 could possibly “erode the credibility of a central bank’s commitment to meet any of its goals, whether for monetary policy or financial stability,” and may appear “the Fed is seeking to monetize the deficit and make it more difficult to return to a normal policy when the time comes.”
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