Saturday, October 19, 2013

Too Much Politics at the Federal Reserve: Fed Supports Politicians’ Overspending

Prior to the September meeting of the Federal Reserve’s (Fed) Federal Open Market Committee (FOMC), Fed bank presidents, who are chosen by bankers and business leaders from across each of the 12 Fed regions, indicated in speeches that their stimulus program would likely be reduced beginning at the September FOMC meeting. During this same period of time, presidential appointed Fed governors, who are also members of the FOMC fell mute.

Surprisingly, instead of reducing the $85 billion monthly bond buying program, entitled QE3, the FOMC decided to maintain intact this unprecedented economic stimulus program. This program, at its current pace, will purchase three-fourths of new federal government borrowing.

Thus the Fed, by buying and holding $3-4 trillion of federal debt, is bailing out Washington’s overspending by providing a ready buyer for bonds and by holding interest rates at near record low levels. And last month, Congressional Democrats torpedoed President Obama’s pick for the next Fed Chair, Larry Summers, in favor of a more compliant Janet Yellen who will likely be on the side of keeping QE3 in place, and potentially even expanding the program, when she assumes the chair position in January 2014.

QE3, in this economist’s judgment, introduces political uncertainty, punishes savers with low interest rates, produces asset price bubbles, and discourages consumer borrowing. The probability of higher future interest rates would encourage home buyers to buy and borrow today. The Fed should begin tapering QE3 ignoring meddling from politicians.

Ernie Goss.

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