The Fed sets forth with more easing to escape hard economy

In what was a highly anticipated, but wholly predictable, announcement, Federal Reserve Chairman Ben Bernanke stated that the central bank would move forward with another round of quantitative easing. Unlike previous rounds, Bernanke said the open-ended purchases would continue until the labor market improved.

The action was taken largely in an effort to reduce the unemployment rate, which Bernanke sees as a “grave danger.” He said he was not as concerned about inflation.

Economists’ reactions came from varying perspectives from its impact on the housing market to assertions that the Fed was moving the goal posts.

One opponent, former Senator Phil Gramm, co-authored an opinion in The Wall Street Journal detailing the hidden costs of monetary easing.

He writes that QE will shorten the average maturity date of externally held debt, and “will require the Treasury to borrow more money sooner when the economy recovers and interest rates start to rise. This too will drive up interest costs and the deficit.”

“The same problems will occur as the Fed begins to sell its holdings of mortgage-backed securities to reduce the monetary base. When the Fed bought these securities, it may have marginally reduced mortgage interest rates. Selling them during a real recovery will likely cause mortgage rates to rise,” Gramm maintains.

The concern Bernanke expressed about the lack of movement in the jobs market was underscored prior to his press conference when whe Labor Department reported that jobless claims had increased more than expected.

 

 

 

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