Tags: Warsh | QE | Untested | Incomplete

Ex-Fed Governor: QE 'An Untested, Incomplete Experiment'

By    |   Wednesday, 13 Nov 2013 07:16 PM

Former Federal Reserve Gov. Kevin Warsh offers a pointed critique of quantitative easing and other elements of Fed policy in a Wall Street Journal opinion piece.

As for QE, bond yields surged during the spring and summer amid hints that the central bank would taper its bond buying. "This episode should engender humility on all sides," writes Warsh, now a lecturer at Stanford Business School.

"It should also correct the misimpression that QE is anything other than an untested, incomplete experiment."

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It has been argued that quiescent inflation justifies a continuation of the Fed's massive easing
program. Warsh doesn't agree.

"Low measured inflation and anchored inflationary expectations should only begin the discussion about the wisdom of Fed policy, not least because of the long and variable lags between monetary interventions and their effects on the economy," he writes.

"The most pronounced risk of QE is not an outbreak of hyperinflation. Rather, long periods of free money and subsidized credit are associated with significant capital misallocation and malinvestment—which do not augur well for long-term growth or financial stability."

Supporters of current Fed policy argue that QE offers broad support to the economy. "Most [general observers] do not question the Fed's good intentions, but its policies have winners and losers, which should be acknowledged forthrightly," Warsh says.

The Fed's purchase of mortgage-backed securities helps existing homeowners while hurting renters and prospective homeowners, he writes. The Fed's interest-rate suppression has pushed investors into stocks, Warsh notes.

"The immediate beneficiaries: well-to-do households and established firms with larger balance sheets, larger risk appetites and access to low-cost credit," he says.

"The benefits to workers and retirees with significant fixed obligations are far more attenuated. The plodding improvement in the labor markets offers little solace."

Many Fed watchers loudly applaud the central bank for its increased transparency in recent years. But Warsh has qualms.

"Full disclosure of its balance sheet and operations is essential to the Federal Reserve's democratic legitimacy," he agrees. "But transparency in communications about future policy is not a virtue unto itself."

The top priority is correct policy, he says. "Given manifest uncertainties about the state of the economy, oversharing policy deliberations is not useful if markets are led astray, or if public commitments reduce policy makers' flexibility to call things the way they see them."

Warsh also takes a shot at the Fed's forward guidance, in which it has said "that tapering is not tightening and that very low interest rates will continue after QE," he says.

"Investors do not agree. Once the Fed begins to wind down its asset purchases, these market participants are likely to reassert their views with considerable force."

Pimco CEO Mohamed El-Erian offers a more upbeat assessment of Fed policy in a Fortune opinion piece.

Last week's buoyant U.S. GDP and jobs numbers raise hope that the Fed's easing program will succeed, he says.

The government reported that GDP expanded 2.8 percent in the third quarter and that the economy gained 204,000 jobs in October.

"The combination of [these data] has been a lot more supportive of the Fed's policy bet," El-Erian writes.

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Former Federal Reserve Gov. Kevin Warsh offers a pointed critique of quantitative easing and other elements of Fed policy in a Wall Street Journal opinion piece.
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2013-16-13
Wednesday, 13 Nov 2013 07:16 PM
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