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Kohn: Fed Action Will Boost GDP by $1 Trillion

By    |   Tuesday, 26 May 2009 11:00 AM

The Federal Reserve's $1.75 trillion buying spree in the credit markets could add $1 trillion to the economy, says Fed Vice Chairman Donald Kohn.

That would amount to a 7 percent addition to economic output (GDP), which now totals $14.1 trillion. It would also create $175 billion in tax revenue, Kohn said in a footnote to remarks presented at a recent seminar, Bloomberg reports.

Already the Fed has committed to buying $1.25 trillion of mortgage-backed securities, $200 billion of agency debt, and $300 billion of Treasuries.

"The preliminary evidence suggests that our program so far has worked," Kohn says, citing as proof the decline in long-term interest rates during recent months.

To be sure, that decline has partly reversed over the past few weeks.

Some critics have complained that the Fed's huge balance sheet expansion creates grave risks of inflation.

Kohn acknowledges these concerns, saying the Fed "needs a framework" for shifting gears to tighter policy once the economy recovers.

But before then, Kohn's comments indicate the Fed will "extend or expand" its purchase of securities in the credit markets, Michael Feroli, a JPMorgan Chase economist, wrote in a report to clients, Bloomberg reports.

Warren Buffett is one of those who is worried about inflation. "A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, at some point, it's going to inflate its way out of the burden of that debt," he told CNBC.

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Economy
The Federal Reserve's $1.75 trillion buying spree in the credit markets could add $1 trillion to the economy, says Fed Vice Chairman Donald Kohn.That would amount to a 7 percent addition to economic output (GDP), which now totals $14.1 trillion. It would also create $175...
gross,domestic,product
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2009-00-26
Tuesday, 26 May 2009 11:00 AM
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