The Federal Reserve should wait for more evidence the economy is slowing before starting a third round of quantitative easing, or QE3, according to Marvin Goodfriend, a former Richmond Fed policy adviser.
“The Fed shouldn’t be premature about that,” Goodfriend, a professor at Carnegie Mellon University in Pittsburgh, said in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “It should wait to see whether this slowdown develops into a more serious contraction and whether disinflation develops into an incipient deflation before it acts.”
Retail sales in the U.S. unexpectedly stagnated in August as a lack of employment and limited income growth restrained demand, highlighting the risk the economy will stall, a report today from the Commerce Department showed. Other recent reports showed payrolls didn’t grow in August and manufacturing expanded at the slowest pace in two years.
“The Fed needs to make sure this downturn doesn’t slide into a deflation,” Goodfriend said. “There is no question in my mind the Fed can do that by going to QE3 and printing more money.”
Fed policy makers at their meeting Sept. 20-21 may decide to replace short-term Treasury securities in the central bank’s $1.65 trillion portfolio with long-term bonds in a bid to reduce rates on everything from mortgages to car loans, according to economists at Wells Fargo & Co. and Goldman Sachs Group Inc.
Fed Chairman Ben S. Bernanke last month said policy makers will discuss the tools they could use to boost the recovery at their next meeting and stand ready to use them if necessary.
Inflating the Economy
“If it acts prematurely, I’m afraid markets will infer that the Fed is trying to inflate the economy perhaps in order to deflate the real value of the public debt as a way of getting us out of a debt overhang problem,” Goodfriend said. “And I think that would cause long-term bond rates to start spiking up, and that would be an utter disaster.”
Treasury 30-year bonds rose after the government sold $13 billion of the debt at a record low yield as European sovereign-debt concern spurred demand. The bonds drew a yield of 3.310 percent, below the previous record of 3.540 percent at the February 2009 offering.
Economists cut their forecasts for growth, according to a Bloomberg News survey taken from Sept. 2 to Sept. 7. The median forecast calls for a 1.8 percent annual pace of expansion in the third quarter, down from 2.1 percent in the previous month’s survey. Growth next year is forecast to average 2.2 percent, down from 2.4 percent.