The Federal Reserve's tactic of using quantitative easing (QE) in a bid to boost economic growth is “like morphine,” former Assistant Treasury Secretary Neel Kashkari told CNBC.
While another round of QE might boost the stock market temporarily, it will do little to prompt "real economic growth," he said.
It makes people feel better, makes good headlines and boosts asset prices, but that is all. He compared such Fed tactics to morphine, a drug that is used to relieve severe pain.
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Quantitative easing (QE) is commonly defined as an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a pre-determined quantity of money into the economy. This is distinguished from the more usual policy of buying or selling government bonds to keep market interest rates at a specified target value.
The economy must move away boosting consumption and economic growth through borrowing, Kashkari, now managing director and head of global equities at Pacific Investment Management Co., stated.
“For 30 years, our economy borrowed to boost consumption, boost gross domestic product growth,” he told CNBC. “That illusion is over. We need to transition away from borrowing to consume toward savings and investment."
The government, he said, should engage in "smart spending," spending on projects that increase U.S. economic competitiveness rather than building "high-speed trains to nowhere."
Many observers believe a third round of quantitative easing (QE3) is coming and that it is just a question of when, Forbes reported. Economists at major banks like Goldman Sachs and Nomura expect QE3, regardless of the Federal Reserve's statements to date.
Goldman Sachs believes second-quarter growth was just 1.1 percent, which Jan Hatzius, an analyst at the firm, called "dangerously close to what would be considered a stall speed for the economy," according to Forbes. Hatzius predicts QE3 sometime late this year or early 2013.
Nomura predicts the Fed will start QE3 in September, probably by buying Treasurys and mortgage-backed securities.
Analysts at High Frequency Economics put the odds of QE3 by the end of the year at more than 50 percent, according to Forbes.
"At this juncture, it seems QE3 is inevitable," Forbes stated. "A new round of QE would help push interest rates lower, while pushing investors into riskier assets."
Still, it is uncertain if the Fed can prompt a real recovery to take hold.
Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did
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