NCPA - National Center for Policy Analysis

Opinions Are Split on Fed Policy Move

November 3, 2010

The Federal Reserve's move to print money to begin a new round of bond-buying, expected to be announced Wednesday, is aimed at lowering long-term interest rates to give the economy a lift.  But inside and outside the Fed, there is an unusual divergence of opinion on how much good it will do -- if any, says the Wall Street Journal

  • Proponents say buying hundreds of billions of dollars more in Treasury bonds will provide only modest support for the economy.
  • Foes warn that it could backfire by pushing up commodity prices, sowing seeds of unwelcome inflation in the future, or by undermining confidence in the Fed's ability to manage -- and eventually reduce -- its holdings.

Economists don't even agree on what another round of quantitative easing would do, says the Journal.

  • Bank of America Merrill Lynch expects it should help push the 10-year Treasury yield to around 2 percent late this year from 2.63 percent today.
  • Mizuho Securities says the effect of any new asset purchases "will be limited."
  • Economists from Nomura Securities International Inc. say another round of quantitative easing would maintain "consumer confidence on track to keep the recovery ongoing."
  • UBS says it would help only "modestly."
  • Deutsche Bank says purchases could hurt the economy if they push the dollar down too far.

Source: Sudeep Reddy and Luca di Leo, "Opinions Are Split on Fed Policy Move," Wall Street Journal, November 1, 2010.

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