Former Federal Reserve Chairman Paul Volcker, an adviser to President Barack Obama, said quantitative easing may spark inflation in the future and the amount involved may be a cause for concern.
“When money is too easy for too long, we will have more” asset bubbles, Volcker, 83, said in Singapore today.
He was commenting as Fed policy makers prepare to meet today and tomorrow in Washington amid concern that economic growth is not strong enough to reduce a U.S. unemployment rate close to 10 percent. The Fed may announce a plan to purchase at least $500 billion of long-term securities in a move known as quantitative easing, according to economists surveyed by Bloomberg News.
Fed Chairman Ben S. Bernanke said on Aug. 27 that the central bank “will do all it can” to sustain the recovery. Investors are anticipating policy makers will announce another round of asset purchases after buying $1.7 trillion in debt from December 2008 to March.
Volcker, chairman of Obama’s Economic Recovery Advisory Board, said he wasn’t sure if the second round of quantitative easing will be “massive.”
While the amount involved may cause concern and inflation may result in the future, the measure is not alarming, he said. The U.S. jobless rate has little chance of going down soon and the nation’s economic problems can’t all be cured in the short run, he said.
As Fed chairman from 1979 to 1987, Volcker raised interest rates to as high as 20 percent to tame inflation, triggering a recession. He spoke today after India raised borrowing costs for the sixth time this year today, while Australia also unexpectedly pushed up interest rates. Last month, China raised rates for the first time since 2007.
Since Bernanke’s comments on Aug. 27 that the Fed was prepared to add stimulus if necessary, the Standard & Poor’s 500 Index has gained around 13 percent, while the dollar has declined about 7 percent against a basket of six currencies.
The U.S. economy grew at a 2 percent annual rate in the third quarter as consumer spending climbed the most in almost four years, the Commerce Department said Oct. 29. Growth in the 2.5 percent to 2.8 percent range is consistent with keeping the jobless rate stable, according to policy makers’ latest forecasts.
Volcker also commented on the president’s changes to the financial system, saying they can’t happen overnight and Wall Street’s attitudes haven’t changed even as the idea that Obama is anti-business is a “misconception.” Banks shouldn’t engage in proprietary trading, he also said.
U.S. regulators are implementing the most sweeping overhaul of financial oversight since the Great Depression. Signed into law by Obama in July, the rules were prompted by a credit crisis that triggered the collapse of Lehman Brothers Holdings Inc. and pushed the U.S. economy into a recession.
The law includes limits to investments by commercial banks in private equity or hedge funds, known as the “Volcker Rule” because of Volcker’s advocacy for the change. Under a measure that may not take full effect for as long as a dozen years, banks can invest in private-equity and hedge funds, though they will be limited to providing no more than 3 percent of the fund’s capital. Banks also can’t invest more than 3 percent of their Tier 1 capital.
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