Saturday, September 15, 2012

This is the Wrong Move by the Fed....and it Certainly IS Political....

September 14, 2012 7:01 pm

Fed risks political fallout from QE3

By Robin Harding and James Politi in Washington

Mitt Romney, the Republican candidate, duly opened fire on Friday after the Fed began an open-ended third round of quantitative easing (QE3), under which it will buy $40bn of mortgage-backed securities a month.

In some of the most aggressive comments he has made on the Fed, Mr Romney said QE3 was nothing but a “sugar high”, and would fail to get the economy moving.

“Recognise that, as the Federal Reserve keeps on trying to stimulate the economy by printing more money, that there’s a cost to that,” said Mr Romney in remarks at a fundraiser.

“The value of your savings goes down. People who are living on fixed incomes don’t see much interest income any more. And the value of the dollar goes down, and the risk for long-term inflation goes up.”

The criticism places the central bank in an uncomfortable position because it is all coming from one direction. Democrats are delighted by the move; Re­publicans are on the attack.

No matter how apolitical the Fed’s decisions – and chairman Ben Bernanke was at pains to assert his indifference to politics in a press conference on Thursday – the Fed’s activism in response to a weak recovery has political consequences.

The question is whether there are also consequences in the other direction: whether political debate about the Fed’s actions could result in change to its mandate or leadership. That remains a more distant prospect.

“What Romney is saying to the Fed is, ‘This is not your job’,” said Phillip Swagel, a professor at the University of Maryland School of Public Policy and a former economist for the George W. Bush administration. “QE3 will have a very modest impact on the economy . . . and if anything it stands in the way of fiscal policy.”

Some conservative economists think the Fed is over-interpreting the employment side of the dual mandate – and by lowering interest rates and making it easier for the US to finance debt in the bond markets, this removes the pressure from Congress to strike a deal on deficit reduction.

The most visible effort to clip the Fed’s wings is a bill introduced in the House of Representatives by Kevin Brady, a Republican from Texas, who is vice-chair of the Joint Economic Committee of Congress. His bill would limit the central bank’s mandate to inflation, not employment, and restrict its monetary policy operations to short-term Treasury securities.

Were his bill now law, Mr Brady told the Financial Times, “the Fed would not be able to embark on this third round of quantitative easing”. He said the bill had taken off faster than he had hoped and already had 48 co-sponsors in Congress. “Everyone, whether they agree or not, believes it is the right time to have this discussion.”

Republican candidate Mitt Romney takes on President Barack Obama in the race for the White House

But while Mr Romney has criticised QE3, it would be a huge leap to eliminate the employment mandate once in office. “I think you can do a lot without changes to the Federal Reserve Act,” says Prof Swagel. “Romney will probably look to appoint the next Fed chair as someone who is aligned with his views.”

That is the most realistic political consequence of the Fed’s actions: that when Mr Bernanke’s term expires at the end of January 2014, a new chairman is appointed who opposes them.

Once settled in the White House, however, even Mr Romney would have to consider whether a tight monetary policy was actually in his interest, given that re-election would probably depend on delivering strong economic growth.

Whether QE3 has any lasting political consequences for the Fed will probably depend on how well it works. “It puts critics of the Fed in a difficult position,” said John Makin, a resident scholar at the American Enterprise Institute in Washington, who called the programme of open-ended easing a “bold experiment”.

The Fed is trying to bring down high unemployment and, while the experiment is in progress, critics will struggle to make headway. If the experiment fails, however, and inflation rises sharply before unemployment comes down, the Fed may find itself hard-pressed to resist the proposals of Mr Brady and his colleagues

AND the ratings agencies do NOT like the move by the Fed...

US Credit Rating Cut by Egan-Jones ... Again

Published: Friday, 14 Sep 2012 | 3:43 PM ET Text Size By: With Reuters
Ratings firm Egan-Jones cut its credit rating on the U.S. government to "AA-" from "AA," citing its opinion that quantitative easing from the Federal Reserve would hurt the U.S. economy and the country's credit quality.

The Fed on Thursday said it would pump $40 billion into the U.S. economy each month until it saw a sustained upturn in the weak jobs market. (Read more: Fed's 'QE Infinity' — Four Things That Could Go Wrong)

In its downgrade, the firm said that issuing more currency and depressing interest rates through purchasing mortgage-backed securities does little to raise the U.S.'s real gross domestic product, but reduces the value of the dollar.

In turn, this increases the cost of commodities, which will pressure the profitability of businesses and increase the costs of consumers thereby reducing consumer purchasing power, the firm said.

In April, Egan-Jones cuts the U.S. credit rating to "AA" from "AA+" with a negative watch, citing a lack of progress in cutting the mounting federal debt.

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