Tags: OBrien | Fed | QE | rates

WaPo's O'Brien: Fed Shouldn't Have Ended QE

By    |   Thursday, 30 October 2014 01:59 PM

Most economists agree that the Federal Reserve did the right thing in announcing an end to quantitative easing (QE) Wednesday.

Some think the Fed should have acted sooner, but very few think the central bank should continue its bond purchases. Washington Post blogger Matt O'Brien is one of them.

"The fact that it's ending QE3 despite still-low inflation and still-high, though declining, unemployment, signals that the Fed is eager to return to normalcy," he writes.

"The Fed, in short, looks much more hawkish. And that's not good, because, as Chicago Fed President Charles Evans explains, the 'biggest risk' to the economy right now is that the Fed raises rates too soon."

QE is no magic bullet, but it's quite effective, O'Brien says. "Especially at convincing markets that the Fed won't raise rates for a while, which is all it should be saying right now, because the only thing worse than having to do QE is having to do QE again."

In other words, he adds, the Fed "should do everything it can to make sure the economy lifts off from its zero interest rate trap before it pulls anything back."

After the Federal Reserve's hawkish policy statement Wednesday, many economists returned to their forecast that the Fed will begin raising interest rates around mid-2015.

Meanwhile, CNBC contributor Ron Insana thinks the Fed will refrain from raising rates next year. He offers five reasons in in his newsletter "Insana's Market Intelligence," provided to Yahoo.
  • Fear of 1937. That's when the economy re-entered recession after the Fed tightened policy five years after the Great Depression.
  • Dollar domination. "A stronger dollar is an implicit tightening of monetary policy, relieving the Fed of some pressure to raise rates sooner, rather than later," Insana notes.
  • Commodity crunch. Falling commodity prices will put downward pressure on inflation, again alleviating the need for the Fed to act on rates.
  • Slow/no global growth. The slow growth in the rest of the world could spill over into the United States.
  • Geopolitical risk. Global military turmoil threatens world economic growth.
"If I am right, such a prediction will have enormous implications for the stock and bond markets here at home and many markets around the world as well," he explains.

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Most economists agree that the Federal Reserve did the right thing in announcing an end to quantitative easing (QE) Wednesday.
OBrien, Fed, QE, rates
Thursday, 30 October 2014 01:59 PM
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