Warsh Says Federal Reserve's Asset Purchases May Fail to Benefit Economy
Federal Reserve Governor Kevin Warsh said he’s concerned the central bank’s expansion of record stimulus may spark too much inflation, fail to aid growth and delay any plans to reduce U.S. indebtedness.
“I am less optimistic than some that additional asset purchases will have significant, durable benefits for the real economy,” Warsh said today in a speech in New York. “Of course, benefits may well be more substantial than I anticipate.”
Warsh’s comments suggest his vote Nov. 3 to support the Fed’s $600 billion of additional Treasury purchases was reluctant. Further disagreement came today from Dallas Fed Richard Fisher, who said the Fed is “monetizing” the government’s debt by printing money to finance the shortfall.
“When non-traditional tools are needed to loosen policy and markets are functioning more or less normally -- even with output and employment below trend -- the risk-reward ratio for policy action is decidedly less favorable,” Warsh said at the Securities Industry and Financial Markets Association’s annual meeting. “These risks increase with the size of the Federal Reserve’s balance sheet.
“As a result, we cannot and should not be as aggressive as conventional policy rules -- cultivated in more benign environments -- might judge appropriate,” Warsh said. The remarks are an expanded version of an opinion column published today in the Wall Street Journal.
Warsh’s comments mean it may not be a sure thing for the Fed to purchase the entire $600 billion amount of securities, said John Ryding, a former Fed researcher.
“You can chalk his speech up as a soft dissent,” said Ryding, chief economist at RDQ Economics LLC in New York. “He’s raising serious concerns and questions of the kind that weren’t raised by some of the other members of the FOMC when talking about the potential costs.”
Chairman Ben S. Bernanke last week defended the decision, saying Nov. 6 that the “standard considerations suggest that we should be using expansionary monetary policy” and that the move was “nothing extraordinary.”
Fisher said in a San Antonio speech that the Fed may be prescribing the “wrong medicine” for the economy. James Bullard, president of the St. Louis Fed, said in New York that the central bank’s decision will probably stimulate the economy as soon as six months from now.
Bullard voted Nov. 3 to support the move, while Fisher isn’t a voting policy maker this year. Kansas City Fed President Thomas Hoenig was the only official to dissent in the 10-1 decision. Fed governors and five of 12 regional Fed presidents vote at each meeting; there’s one vacancy among the seven governors.
The minutes from the FOMC meeting, scheduled to be released on Nov. 24, “will try to provide some clarity over the nature of disagreement” among policy makers, Warsh said in response to audience questions after his speech. Overall, “my colleagues are remarkably focused on our statutory mandate” of price stability and full employment, he said.
Warsh’s skepticism about asset purchases isn’t new. In June, he said any decision to expand the $2.3 trillion balance sheet must be subject to “strict scrutiny.”
In today’s speech, he reiterated points from the column that the Nov. 3 decision wasn’t unconditional or open-ended and that the move is “necessarily limited, circumscribed and subject to regular review.”
“Policies should be altered if certain objectives are satisfied, purported benefits disappoint, or potential risks threaten to materialize,” Warsh said.
The Fed won’t bring down the U.S. unemployment rate to its natural level without reforms in fiscal, trade and regulatory policies, Warsh said in response to questions.
“Monetary policy cannot do it alone,” he said. The Fed “should not be overpromising.”
The expanded stimulus carries “significant risks that bear careful monitoring,” including inflation from a weaker dollar and higher commodity prices, he said. In addition, buying more Treasuries “also runs the more subtle risk of obfuscating price signals about total U.S. indebtedness,” he said.
“Long-term economic growth necessitates putting the U.S. fiscal trajectory on a sounder footing,” Warsh said. “The fiscal authorities need as clear an early warning system as possible, not a handy excuse to delay.”
Kurt Karl, chief U.S. economist at Swiss Re Financial Products in New York, said he didn’t think Warsh’s reservations would change the course of the Fed in deciding next year whether to expand the second round of asset purchases. Bonds “didn’t move much today” in response to the remarks, he said. The 10- year Treasury yield rose 0.02 percentage point to 2.55 percent at 5:07 p.m. in New York, according to BGCantor Market Data.
“If it’s very successful, I think dissent will diminish enormously, and if it looks like there’s another one necessary, then we’ll have another one,” Karl said, referring to the program of asset purchases.
Warsh, 40, a former Morgan Stanley investment banker and economic-policy adviser under President George W. Bush, was appointed to the Fed in 2006 and worked closely with Bernanke on the response to the financial crisis in 2008.
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