Tags: Roach | us | Economy | Emergency

Yale’s Roach: U.S. Economy Is ‘Out of the Emergency Room’

Wednesday, 04 April 2012 01:22 PM

Federal Reserve forecasts that the U.S. economy is “out of the emergency room” signal policy makers should reduce easing to avoid creating another financial bubble, according to Yale University’s Stephen Roach.

“If the economy doesn’t need to be on life support, why are we keeping all these steroids running into the patient?” Roach, a former non-executive chairman for Morgan Stanley in Asia, said in an interview on Bloomberg Radio’s “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

“There’s a huge inconsistency with what the Fed is saying and what they’re doing. They’re saying the crisis is over.”

Editor's Note: Did Bernanke Rig Your Retirement? Shocking Video . . .

Treasurys and stock markets fell after the release of the Federal Open Market Committee’s March 13 meeting minutes showed the central bank is holding off on increasing monetary accommodation unless the U.S. economic expansion falters or prices rise at a rate slower than its 2 percent target.

Fed policy makers in January forecast the economy would grow 2.2 percent to 2.7 percent in 2012 and the unemployment rate would end the year at 8.2 percent to 8.5 percent. By the end of 2014, the FOMC expects a jobless rate of 6.7 percent to 7.6 percent, still above their goal for maximum employment of 5.2 percent to 6 percent.

The 10-year yield fell seven basis points, or 0.07 percentage point, to 2.23 percent at 12:56 p.m. New York time, according to Bloomberg Bond Trader prices. Yields rose 12 basis points to 2.30 percent yesterday.

“We’re sowing the seeds probably, with all this easy money at a time when the economy is recovering, for potentially another bubble,” Roach said.

“When things are starting to look better, you want to take your foot off the accelerator.”

The 2008 financial crisis, which sparked the worst recession since the Great Depression, was set up by monetary policy that kept borrowing costs too low for too long, Roach said.

The U.S. central bank kept its target rate for overnight bank lending at 1 percent for a year starting in June 2003. The Fed lending rate has been zero to 0.25 percent since December 2008, following the bursting of the housing bubble and the collapse of Lehman Brothers Holdings on Sept. 15, 2008.

“They stayed easy for too long and that set us up for the big crisis that brought us down, and the Fed’s in denial over that to this very day,” Roach said.

“If the recovery is as sustainable as the Fed officials are arguing, the emergency is over, and rates should start to rise. They should start to rise on a regular basis, not a one off.”

The Fed bought $2.3 trillion of bonds in two quantitative- easing rounds from December 2008 until June 2011 to spur the economy. In September it announced it would buy $400 billion of longer-term U.S. securities through June while selling an equal amount of shorter-term debt in its holdings to lower borrowing costs.

Editor's Note: Did Bernanke Rig Your Retirement? Shocking Video . . .

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Wednesday, 04 April 2012 01:22 PM
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