Tags: Rubin | Fed | QE | risk

Robert Rubin: Fed's QE3 and the Unwinding of it Carry Great Risk

By Dan Weil   |   Friday, 10 Jan 2014 07:31 AM

Both the Federal Reserve's latest quantitative easing effort (QE3) and the effort to reverse it raise dangers for the economy and the financial system, says former Treasury Secretary Robert Rubin.

The Fed has started to taper QE3, deciding last month to cut its bond purchases by $10 billion a month, leaving them at $75 billion.

"There are widely posed questions about the benefits of QE3, but the risks are significant," Rubin writes in the Financial Times.

Editor’s Note:
Get These 4 Stocks Before 399% Stock Market Rally!

"One is that central bank action will reduce market pressure on political leaders to act. Another is financial moral hazard, where that same comfort may increase reaching for yield in riskier asset classes."

But the biggest risk lies in the Fed's exit strategy, Rubin says.

"Unwinding the vast enlargement of the Fed’s balance sheet and liquidity greatly increases the usual risks in monetary policy aimed at price stability, growth and employment. Greater uncertainty means navigating uncharted waters, with heightened chances that tightening leads to a significant downturn," he writes.

A slow exit raises the threat of inflation, and the huge expansion of bank reserves that the Fed has fostered could spark an excess supply of credit, Rubin argues.

"Unconventional monetary policy and stimulus can be part of a successful economic program for a period of time. But they are no substitute for fiscal discipline, public investment and structural reform."

Fed officials appear to be aware of the dangers. The minutes of their December meeting show they are on the lookout for financial bubbles.

"The Fed is looking for evidence that they may be creating asset bubbles," Dan Greenhaus, chief global strategist at brokerage firm BTIG, told The Wall Street Journal. "That's better than not looking."

Editor’s Note: Get These 4 Stocks Before 399% Stock Market Rally!

Related Stories:

© 2015 Newsmax Finance. All rights reserved.

1Like our page

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

© Newsmax Media, Inc.
All Rights Reserved