Volcker Says Quantitative Easing May Create Inflation in Future

Former Federal Reserve Chairman Paul Volcker, an adviser to President Barack Obama, signaled that some investors are concerned about the potential inflation risks of quantitative easing and record-low interest rates.

“It does worry people” that “we’re going to create so much money that down the road we’ll create inflation,” Volcker, 83, said in response to a question about the global implications of quantitative easing at an event at the National University of Singapore today. “I don’t think that’s beyond the capacity of the central bank to deal with in the future. But they’re going to have to deal with it.”

His comments come as Fed policy makers prepare to meet today and tomorrow in Washington amid concern that economic growth is not strong enough to reduce a U.S. unemployment rate close to 10 percent. The Fed may announce a plan to purchase at least $500 billion of long-term securities, according to economists surveyed by Bloomberg News.

U.S. policy makers, pursuing unprecedented stimulus, have cut the benchmark rate almost to zero and bought $1.7 trillion in securities without generating growth fast enough to bring down unemployment from near a 26-year high. Fed Chairman Ben S. Bernanke said on Aug. 27 that the central bank “will do all it can” to sustain the recovery, as investors anticipate further Fed asset purchases after its first round of debt-buying from December 2008 to March.

How Much?

Volcker, chairman of Obama’s Economic Recovery Advisory Board, said the Fed’s debt buying in itself isn’t a concern as the U.S. jobless rate, 9.6 percent in September, has little chance of going down soon and the nation’s economic problems can’t all be cured in the short run.

“It doesn’t alarm me that they’re thinking about buying Treasuries,” he said, referring to quantitative easing. “It’s the volume which they choose to do and we don’t know what that is,” he said, adding that “if money is too easy for too long, we’ll have more” asset bubbles.

As Fed chairman from 1979 to 1987, Volcker raised interest rates to as high as 20 percent to tame inflation, triggering a recession. “Dealing with inflation and inflation potentials is always a challenge,” he said. “It’s manageable but not easy.”

The Federal Reserve’s preferred price measure, which excludes food and fuel, was unchanged in September from the prior month and was up 1.2 percent from a year earlier, the smallest gain since September 2001.

Central Banks

As U.S. policy makers consider measures to boost the economy against the backdrop of mid-term congressional elections, other central banks are seeking to curb inflation. India today raised borrowing costs for the sixth time this year, while Australia also unexpectedly pushed up interest rates. Last month, China raised rates for the first time since 2007.

Since Bernanke’s comments on Aug. 27 that the Fed was prepared to add stimulus if necessary, the Standard & Poor’s 500 Index has gained around 13 percent, while the dollar has declined about 7 percent against a basket of six currencies.

The U.S. economy grew at a 2 percent annual rate in the third quarter as consumer spending climbed the most in almost four years, the Commerce Department said Oct. 29. Growth in the 2.5 percent to 2.8 percent range is consistent with keeping the jobless rate stable, according to policy makers’ latest forecasts.

‘Misconception’

Volcker also commented on the president’s changes to the financial system, saying they can’t happen overnight and Wall Street’s attitudes haven’t changed even as the idea that Obama is anti-business is a “misconception.” Banks shouldn’t engage in proprietary trading, he also said.

U.S. regulators are implementing the most sweeping overhaul of financial oversight since the Great Depression. Signed into law by Obama in July, the rules were prompted by a credit crisis that triggered the collapse of Lehman Brothers Holdings Inc. and pushed the U.S. economy into a recession.

The law includes limits to investments by commercial banks in private equity or hedge funds, known as the “Volcker Rule” because of Volcker’s advocacy for the change. Under a measure that may not take full effect for as long as a dozen years, banks can invest in private-equity and hedge funds, though they will be limited to providing no more than 3 percent of the fund’s capital. Banks also can’t invest more than 3 percent of their Tier 1 capital.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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