Fed's Vow to End QE May Run Into Economic Reality

 

IBDEditorials.com

Monetary Policy: Federal Reserve chief Ben Bernanke says the central bank is getting ready to end its experiment in quantitative easing, perhaps beginning as early as September. To which we say: good riddance.

Financial markets plunged and interest rates spiked after Bernanke all but announced he'll begin tapering the Fed's $85 billion a month debt-buying binge, or "quantitative easing."

Based on other Fed comments, the central bank wants to "moderate the monthly pace of purchases" of U.S. Treasury and agency debt to about $65 billion a month starting in September. That's a net loss of $20 billion a month in Fed "stimulus."

And the stimulus, we're told, might end entirely next year if, as expected, unemployment drops below 7%.

This isn't a bad thing. True, the Fed's quantitative easing (QE) and zero-interest-rate policies have been the only game in town, but they've also distorted markets, making it harder for investors, homeowners and entrepreneurs to make rational economic decisions.

By massively buying Treasury and agency debt — much of it Fannie Mae and Freddie Mac — the Fed has squashed down mortgage rates, leading to an artificial boom in housing activity. Its zero-interest-rate policy has kept the economy simmering at subpar 2% growth — not a recession, but nothing to write home about.

Since the fiscal crisis in 2008, the bank has added nearly $3 trillion in assets to its balance sheet — an amount equal to about 20% of U.S. GDP. It's an unparalleled monetary expansion that hasn't worked. But it has greatly increased future U.S. financial risks.

So, yes, investors should be happy if QE ends. But it's no sure thing, despite what the Fed says now.

For one, both jobs and economic growth are way below average. GDP grew just 2.2% last year, and may not hit 2% this year. Meanwhile, more than four years after a recovery began, we're still 3 million jobs below 2007's employment peak — with unemployment stuck at 7.6% and 24 million Americans unable to find jobs.

So unless the economy improves substantially in coming months, quantitative easing might still be with us.

And remember, budget deficits are still expected to be in the $500 billion to $1 trillion range for years to come. Who will buy all that new debt, if not the Fed?

Moreover, interest rates will surely spike when QE ends. When they do, the economy could be pushed back into recession and U.S. deficits will soar. So the Fed has painted itself — and the economy — into a corner.

Bernanke is rumored to be leaving office in January 2014 — a mere seven months from now. His likely replacement is liberal Fed economist Janet Yellen, an inflation dove with ties to the Democrats. Will she end QE next year if doing so makes Obamanomics look bad?

While we'd like nothing more than to see the Fed end its failed QE experiment, it's no sure thing. Still, if the Fed fulfills its pledge, we'll applaud loudly.

Yes, withdrawal from the Fed's money drug will be hard for the economy, but we'll all be stronger for it.

It can be argued our central bankers did what they had to do during the 2008 financial crisis. But now it's time for them to step back, stop meddling and restore some free-market discipline to our fettered economy.