Tags: Damodaran | Fed | approaching | insanity

NYU Economist Damodaran: Fed is ‘Fast Approaching’ Insanity

By    |   Wednesday, 19 Sep 2012 08:42 AM

The Federal Reserve’s decision to adopt a third round of quantitative easing (QE) reminds New York University finance professor Aswath Damodaran of the movie “Groundhog Day.”

The film’s main character, played by Bill Murray, repeats the same day over and over again.

As for the Fed, “I was a skeptic on the efficacy of QE2 and Operation Twist, and I remain unpersuaded on QE3,” Damodaran writes on his blog.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

“If the definition of insanity is that you keep trying to do the same thing over and over, expecting a different outcome, then we seem to be fast approaching that point with the Fed.”

It’s impossible for the Fed to accomplish its central goal of sparking economic growth and hiring by pushing long-term interest rates lower, Damodaran says.

“There is an inherent contradiction between the Fed's action and its objective,” he writes. “If the economy starts growing faster, market interest rates cannot and will not stay low, no matter what the Fed does.”

The only way the Fed can keep rates down, he says, is if those low rates don’t succeed in boosting the economy.

One thing QE3 will do is end the rally in Treasury bonds, market participants say. That’s because the Fed’s move will push investors out of Treasurys and into assets that offer the opportunity of higher returns.

"We believe this policy is very negative for long-end Treasury paper," Richard Gilhooly, interest-rate strategist at TD Securities, tells The Wall Street Journal.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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The Federal Reserve’s decision to adopt a third round of quantitative easing (QE) reminds New York University finance professor Aswath Damodaran of the movie “Groundhog Day.”
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Wednesday, 19 Sep 2012 08:42 AM
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