With fiscal policy hamstrung by political gridlock in Congress, many look to the Federal Reserve as the sole source of salvation for a teetering economy.
Fed Chairman Ben Bernanke has said recently that the central bank will expand its quantitative easing program if necessary. Under quantitative easing, the Fed buys fixed-income securities to enlarge its balance sheet.
But former Bush (George W.) administration economist John Taylor, now at Stanford University, says more quantitative easing will have little effect.
“There’s now a cost-benefit analysis for future actions, which I’d contrast with the ‘whatever it takes’ philosophy of the crisis,” Taylor, creator of an interest-rate formula used by central banks, told Bloomberg.
“The benefits of additional quantitative easing are quite small.”
Former Reagan administration official Martin Feldstein, now at Harvard, agrees.
“I really don’t think that there’s a lot that the Fed can do,” he told Bloomberg. Buying more securities is probably the Fed’s best strategy, Feldstein says. But, “even if they did quite a lot of it, say $1 trillion worth, I don’t think it will have a substantial impact.”
As former Fed vice chairman Alan Blinder described the Fed’s predicament to The New York Times, “its really powerful ammunition has been expended.”
When you combine the Fed’s weakened position with the political paralysis in Washington, the chances for a lost economic decade stand as “a much bigger risk,” he said.
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