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Steve Forbes: Volatility to Roil Markets as Fed ‘Trashes’ Dollar

Monday, 19 Nov 2012 11:09 AM

Expect markets to roil in volatility in the short term as the Federal Reserve “trashes” the dollar by sticking with its ultra-loose monetary policies, said publisher and one-time presidential candidate Steve Forbes.

The Fed has said it will stick with its quantitative easing (QE) program until it sees noted improvement in the labor market.

Under the Fed’s current QE program, the third in four years, the Fed will buy $40 billion in mortgage debt a month from banks on an open-ended basis, pumping the economy full of liquidity to drive down borrowing costs to encourage investing and hiring.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Critics of such policy, including Forbes, say side effects include a weaker dollar and mounting inflationary pressures, while also arguing that past liquidity injections haven’t brought the benefits they were supposed to bring to the economy, as jobless rates remain high.

“Short term, were going to have a lot of turbulence and in no small part because the Federal Reserve is still out to trash the dollar,” Forbes told CNBC.

Fiscal uncertainty will fray nerves, as well.

“All the European countries are raising taxes. Japan’s raising taxes. We’re going to raise taxes, it’s just a matter of how much, so we’re going to have some rough sledding next year.”

Some economists have said the United States and elsewhere are entering a period where the so-called “new normal” will be marked by higher unemployment and slower growth rates than in the past.

That shouldn’t be the case, and better days will return once the country’ pushes back against President Barak Obama’s policies, healthcare reform especially.

“I think the silver lining is Obamacare starts to kick in and it’s going to get a real adverse reaction, hostile reaction like it did in 2009 and 2010,” Forbes told the network.

“So I think out of this in the next four or five years you’ll see a real push for free markets in healthcare.”

Meanwhile, expect the country to grow weary of the Fed’s interventionist policies as well.

“I think the Fed is going over the cliff, so to speak, and will push reform there to get a stable dollar again,” Forbes said.

“Clearly the economy is not going to be in the kind of buoyant mode it was in the ‘80s and ‘90s, and people are going to ask why. This new normal is the new abnormal. There is no reason why we should have the miserable growth rates.”

The Fed recently released the minutes of its October monetary policy meeting, which revealed that board members favor increased intervention.

On top of QE, the Fed is running another stimulus program dubbed by the markets as Operation Twist.

Under Operation Twist, the Fed purchases longer-duration Treasury securities while selling an equal amount of shorter-duration Treasury securities with the aim of keeping long-term interest rates low.

Unlike QE, however, Operation Twist does not inject fresh liquidity into the economy and doesn’t expand the Fed’s balance sheet.

Still, Operation Twist is due to expire in December, though it could be renewed, the minutes suggested, which signals the Fed remains likely willing to see the dollar stay weak and policy loose until more Americans find jobs.

“Looking ahead, a number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity extension program in order to achieve a substantial improvement in the labor market,” the Fed minutes read.

Some Fed officials are concerned that QE — described by many as printing money out of thin air — might push up consumer prices.

“Several participants expressed concerns that sizable asset purchases might eventually have adverse consequences for the functioning of asset markets or that they might complicate the [Federal Open Market Committee’s] ability to remove policy accommodation at the appropriate time and normalize the size and composition of the Federal Reserve’s balance sheet,” the minutes read.

“A couple of participants noted that an extended period of policy accommodation posed an upside risk to inflation.”

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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