Harvard economics professor Martin Feldstein sees great danger if the Federal Reserve decides to go for another round of quantitative easing (QE3).
“The risk that worries me most is the risk about exit strategy,” Feldstein, an adviser to Republican presidential nominee Mitt Romney, tells CNNMoney.com.
So what’s the exit risk? “We don't have a clear idea of how far they would have to raise rates to deal with banks that have more than $1 trillion of excess reserves deposited at the Fed,” says the former chairman of President Ronald Reagan’s Council of Economic Advisers.
Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans
“When the time comes, they may have to raise rates a lot, and at that time unemployment may be higher than it normally is when the Fed wants to raise rates.”
Unemployment stood at 8.3 percent in July, and economists don’t expect it to fall much soon. September figures are due out Friday.
But high joblessness means Congress may strongly oppose tightening, Feldstein says. So the Fed may be afraid to do so lest Congress take some of its power.
This sounds like a recipe for gridlock. And on top of that the Fed may be brewing a bond bubble, Feldstein says.
A speech by Federal Reserve Chairman Ben Bernanke Friday convinced many experts that QE3 is coming.
“The door is wide open to the Fed,” Josh Feinman, a money manager at Deutsche Bank, tells Bloomberg. “By the end of the year we’ll probably get both rate guidance extension and more asset purchases.”
Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans
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