House Republicans Wary of Fed Asset Purchase Plan, Garrett Says
New Jersey Representative Scott Garrett said House Republicans are concerned that another round of large-scale bond purchases by the Federal Reserve could fan an asset bubble or validate more deficit spending by Congress.
“I have concerns,” said Garrett, a Republican member of the House Financial Services Committee, which oversees the Fed. “A substantial number of my Republican colleagues would have concerns with the Fed taking this action.”
U.S. central bankers have kept their benchmark lending rate near zero for almost two years, and may be preparing for another round of bond purchases to boost growth. In March, they finished $1.7 trillion in purchases of Treasuries, mortgage-backed securities, and housing agency bonds. Chicago Fed President Charles Evans told the Wall Street Journal yesterday that “much more accommodation” is needed to get the economy back to full employment and stable prices.
“We could just be seeing the Fed just repeating its process of creating another bubble,” Garrett said in a telephone interview today. “Economists would indicate that they are already potentially starting out there in certain commodities.”
Commodities rose to the highest in almost two years on speculation central banks around the world will provide additional monetary stimulus. The Bank of Japan yesterday pledged to keep its benchmark interest rate at “virtually zero” and set up a 5 trillion yen ($60 billion) fund to buy government bonds and other assets.
Nobel Prize-winning economist Joseph Stiglitz also said the Federal Reserve’s policy of cutting interest rates to a record low has had repercussions worldwide, including currency misalignments and the risk of asset price bubbles.
“Fed policy was supposed to reignite the American economy, but it’s not doing that,” Stiglitz, a professor at Columbia University in New York, said in a Bloomberg Television interview today. “The flood of liquidity is going abroad and causing problems all over the world.”
The Standard & Poor’s GSCI Index of 24 raw materials rose as much as 0.6 percent to 559.976, the highest level since Oct. 7, 2008, before paring gains. The UBS Bloomberg Constant Maturity Commodity Index climbed to 1,442.24, the highest since Aug. 29, 2008. Gold futures rose to a record, topping at $1,351 an ounce, and silver futures extended a rally to a 30-year high.
A slowdown in growth in the middle two quarters of this year prompted the Federal Open Market Committee last month to warn that inflation rates were “somewhat below” its mandate to achieve stable prices and full employment, raising expectations that the U.S. central bank will consider an additional round of Treasury purchases at its two-day meeting Nov. 2-3. The Fed’s balance sheet currently stands at $2.3 trillion in total assets.
Garrett said Republicans are also concerned that additional Fed action would provide a backstop for deficit spending.
“You don’t have to get spending under control if you know that the Fed is always there to buy up every Treasury,” Garrett said. “This just facilitates the reckless behavior that the Congress has been on for the last several years.”
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