Yale University professor Stephen Roach said the Federal Reserve is playing a “dangerous game” in promising to sustain record levels of stimulus until the labor market improves markedly.
The Federal Open Market Committee said last month it will keep the main interest rate near zero until at least mid-2015 and buy $40 billion of mortgage debt a month in a third round of quantitative easing. Fed Chairman Ben Bernanke said Oct. 1 that the support for the economy will be maintained even once growth picks up.
The problem with the strategy, in Roach’s view, is that the central bank’s funds are being channeled into asset prices rather than the real economy.
Lack of growth or questions about government actions “doesn’t mean the Fed should come in with untested experimental medicine,” Roach said today on “Bloomberg Surveillance” with Tom Keene. By adding “excess liquidity into the economy that is not absorbed and that spills over into asset markets, the Fed is creating destabilizing dangerous” situation.
Roach repeated his call for Bernanke to be replaced when his term ends in January 2014 and urged U.S. policy makers to find a way to reduce both fiscal and monetary stimulus.
“We really need to think much tougher about getting policy settings, both fiscal and monetary back to more normal, sustainable level,” he said. Policy makers need “the courage of implementing an exit strategy has to do with political will and this central bank has none of that.”
Speaking after the European Central Bank decided to keep its benchmark interest rate on hold at a historic low of 0.75 percent, Roach endorsed the decision, saying a cut would do little to spur growth in the 17-nation euro area.
“What are they going to get from that?” Roach asked, referring to the possibility of a rate cut. The euro “does suffer from the obvious missing pieces of fiscal and political union,” he said. “That’s going to overhang the monetary union, monetary policy and the economy for the foreseeable future.”