Fed News Friday: On fears of European debt crisis, the Fed signals more printing to “stabilize” housing markets
October 21st, 2011
This week, fearing the secondary and tertiary effects of a mounting European debt crisis, Federal Reserve officials like Fed Chairman Ben Bernanke and Vice Chairman Janet Yellen (pictured above) have hinted at more print-and-spend “solutions” to come. In a closed-door (so much for transparency) meeting Thursday with Senate Democrats, those who were in the room report that Bernanke spent over an hour warning of the European debt crisis and advocating measures to stabilize the housing market in the United States.
Senators wouldn’t tell reporters exactly what Ben Bernanke prescribed, citing “traditional sensitivity” to the chairman’s remarks (so much for transparency– wait, did I say that already? –well this is an article about the Federal Reserve), but on Friday, Vice Chair Janet Yellen offered a hint as to the Federal Reserve’s plan for preempting any economic fallout from Europe’s debt crisis, and you’ll never guess what it is! They’re going to print more money and buy up mortgage-backed securities to hold down interest rates in the housing market. The WSJ reports:
‘Financial market conditions have deteriorated since the summer, foreign economies are softening, and the threat of a financial shock from Europe is, “particularly worrisome,” Janet Yellen, vice chair of the Fed, said in a speech in Denver. Taken together, she noted, there were “significant downside risks” to the economy.
Fed officials have completed two rounds of securities purchases adding $2.3 trillion of mortgage bonds and Treasury debt to the central bank’s securities portfolio. They sought to take bonds out of investors’ hands and in the process drive down long-term interest rates, hoping to spur spending and investment. A new round of securities purchases, Ms. Yellen said, might be needed.
Her comments come a day after another Fed official, Daniel Tarullo, a governor on the Fed’s board, explicitly called for the central bank to strongly consider new purchases of mortgage-backed securities.’
Yellen’s call for more print-and-spend “stimulus” from the Fed comes despite her assertion that the U.S. economy has seen “noticeably stronger” growth in the second half of the year, because of worries that this growth could come to a stop if banks anxious about Europe’s debt crisis tighten up credit. But one Fed president actually disagrees, insisting that inflation, not deflation is the real significant downside risk to the economic outlook:
‘Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said the central bank has been inconsistent. Inflation picked up this year while unemployment has come down, he noted in a speech in Minneapolis. That calls for less Fed money-pumping, not more.
Recent easing moves by the Fed, he said, are “thus inconsistent with the evolution of the economy in 2011.” The inconsistency, he added, suggests the Fed has become more tolerant of inflation, weakens its credibility and “could give rise to a damaging increase in inflationary expectations.”
The Fed is effectively trading off the long-term health of the economy with short-term measures, he said.’
You heard it from a Fed president, not me. Meanwhile, as the Federal Reserve potentially gears up for another round of heavy spending, critics are still pointing to the results of the limited, one-time GAO audit of the Federal Reserve, arguing that increased spending on mortgage-backed securities will only hurt the economy by raising inflation, and– in a widely-syndicated opinion column by Congressman Ron Paul this week– suggesting that the entire central-banking paradigm is what ultimately stifles true, stable, and lasting economic growth.
