Could the Economy Sink Even Further?

A recent article posted in Realtor.org, Fed's Aggressive Policy Sparks Critics, discusses the decision announced Wednesday that the Federal Reserve would be buying $600 Billion in Treasure securities.

When the Federal Reserve announced Wednesday that it intended to buy $600 billion in Treasury securities through June, it also signaled that it could make more purchases after that if unemployment remained too high and inflation too low.

But after the announcement many deficit hawks who warned about inflation earlier this year repeated those warnings anew. The Cato Institute, citing a former vice president of the Dallas Fed, said the new program would “sink” the economy.

It’s always possible that the critics are correct and that, this time, inflation really is just around the corner. But there is still no good evidence of it. The better question may be whether the Fed is still behind the curve.

Some economists are optimistic that it has finally found the right balance. Manoj Pradhan, a global economist at Morgan Stanley, pointed out that bond purchase programs lifted growth in Europe and the United States last year—and a broadly similar approach also helped end the Great Depression.

“There are no guarantees,” Pradhan said, “but the historical precedents certainly suggest it will work.”

Others, though, wonder if the program is both too late and too little. “I’m a little disappointed,” said Joseph Gagnon, a former Fed economist who has strongly argued for more action.

The announced pace of bond purchases appears somewhat slower than Fed officials had recently been signaling, Gagnon added, which may explain why interest rates on 30-year bonds actually rose after the Fed announcement.

One thing seems undeniable: the Fed’s task is harder than it would have been six months ago. Businesses and consumers may now wonder if any new signs of recovery are another false start.

Source: The New York Times, Sewell Chan and David Leonhardt 11/03/2010

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