Tags: Malpass | Fed | tapering | economy

Former Reagan Adviser David Malpass: Fed Tapering Already Boosting Economy

By    |   Friday, 14 March 2014 11:22 AM

The Federal Reserve's tapering of its quantitative easing is "good news for small businesses, jobs and living standards," says David Malpass, president of Encima Global research firm and former adviser to Ronald Reagan.

While many assume that the Fed is printing money to finance its bond purchases, it actually "borrows heavily from banks, setting arbitrarily low interest rates and diverting credit away from job creators," Malpass writes in The Wall Street Journal.

"It's been sucking oxygen out of the economy, explaining the very weak growth and jobs performance from 2009-13. As the Fed winds down its bond buying, it will also stop its new bank borrowing, allowing a better allocation of credit in the economy."

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Indeed, the economy already is benefiting, Malpass says. Bank lending surged in January and February as the Fed tapered, with commercial and industrial bank loans rising at a 21 percent annual rate.

"The banking system's balance sheet will go through a powerful, growth-oriented transformation as it adjusts to the taper," Malpass says. Banks will make loans to small businesses rather than the Fed, he says.

"The evolution in Fed policy may be enough to finally break the economy out of slow growth."

Meanwhile, Philadelphia Fed President Charles Plosser says the Fed may have to speed up its tapering pace — $10 billion at each of its last two policy meetings.

"Reducing the pace of asset purchases in measured steps is moving in the right direction, but the pace may leave us well behind the curve if the economy continues to play out according to the FOMC [Federal Open Market Committee] forecasts," he said in a speech last week, Bloomberg reports.

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The Federal Reserve's tapering of its quantitative easing is "good news for small businesses, jobs and living standards," says David Malpass, president of Encima Global research firm and former adviser to Ronald Reagan.
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Friday, 14 March 2014 11:22 AM
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