Fed manipulation harms U.S. growth – ex-Fed’s Warsh

January 30, 2012 at 17:04


The Federal Reserve’s latest efforts to bolster the recovery with unprecedented policy tools will hurt the U.S. economy in the long run, a former member of Fed Chairman Ben Bernanke’s inner circle suggested on Thursday.

In his first public comments since stepping down as a Fed governor last March, Kevin Warsh said there is a place for exceptionally accommodative monetary policy to provide “important transitional support for an economy.”

“But recent policy activism — measures that go beyond a central bank’s capacity or traditional remit — threatens to forestall recovery and harms long-term growth,” Warsh said, according to excerpts of remarks prepared for delivery to the Stanford Institute for Economic Policy Research.

Warsh was the only member of Bernanke’s inner circle with close ties to Republican lawmakers. An inflation hawk, Warsh nevertheless voted in favor of the Fed’s groundbreaking moves to ease monetary policy after the financial crisis, including two bond-buying programs that swelled the Fed’s balance sheet to unprecedented levels.

But Warsh apparently grew increasingly uncomfortable with the dovish stance of the central bank. Shortly after the Fed launched its second round of so-called quantitative easing, in November 2010, Warsh publicly expressed doubt over its effectiveness.

He announced his resignation the following February, and is currently a visiting fellow at Stanford’s Hoover Institution.

Since Warsh’s departure, the Fed has embarked on still more easing, signaling last August its intent to keep rates ultra-low through at least mid-2013. On Thursday it extended that low-rate vow through late 2014.

The Fed also began publishing policymakers’ forecasts for short-term interest rates and adopted an explicit inflation target for the first time, setting the target at 2 percent. Bernanke said both moves would clarify the Fed’s policy decisions, making them more effective.

Bernanke also opened the door wide to a third round of quantitative easing, saying continued low inflation and high unemployment would create a case for it.

On Thursday, Warsh took aim at Bernanke’s latest communications push and his recent foray into housing policy.

“Central bank transparency is good, but transparency that delineates future policy breeds market complacency,” Warsh said. “It threatens to undermine the wisdom of crowds and the essential interchange with financial markets.”

Warsh also was critical of leaning on government-run mortgage finance firms to pull the country from its housing slump, a policy idea the Fed floated in early January in an unsolicited paper to top lawmakers outlining a number of ways to revive the sector.

The paper noted that exposing the firms to losses could be worthwhile if such actions could spur a vigorous recovery in housing, the bane of the current sluggish recovery.

Warsh disagreed.

“The government-sponsored housing entities remain sources of vulnerability to the U.S. economy, and repeated ad-hoc attempts to push Fannie Mae and Freddie Mac to take greater risks at taxpayer expense is deeply counterproductive,” Warsh said, according to the excerpts.