Meltzer Says Easing Unhelpful as Meyer Says Fed Must Act
The Federal Reserve can’t reduce unemployment and easing further won’t be effective, Carnegie Mellon University’s Allan Meltzer said today at the Bloomberg Hedge Funds Summit. Former Fed Governor Laurence Meyer, speaking at the same event, said the central bank should do more.
“The Fed can’t control the unemployment rate,” Meltzer, an economist and Fed historian, said in New York. An expansion of the Fed’s excess reserves has already provided banks with an adequate supply of money for lending, he said.
Chairman Ben S. Bernanke and his colleagues are weighing whether to expand their third round of asset purchases, a move some officials have said would help offset the end of a plan known as Operation Twist. In that program the Fed each month swaps $45 billion of short-term Treasuries for longer-term debt.
“We have an unemployment problem,” Meltzer said. “It’s a real problem, not a monetary problem. There are $2.8 trillion worth of excess reserves. But ask yourself, ‘What can the Federal Reserve do by adding more reserves that banks can’t do?’”
Meyer, senior managing director at Macroeconomic Advisers LLC in Washington, said the central bank is obligated under its congressional mandate to reduce the jobless rate.
“The Fed can over the timeframe of over two or three years can have a significant effect in pushing the economy towards full employment and at the same time focusing on the medium term inflation outlook,” Meyer said. “They have a responsibility. They can do it. They should do it.”
The Fed is working to boost the economy and reduce unemployment stuck near 8 percent this year by continuing purchases of housing debt that have helped drive borrowing costs to an all-time low. The average fixed rate on a 30-year mortgage was 3.32 percent last week, close to the prior’s week’s 3.31 percent record low, Freddie Mac data show.
“We’re optimists,” Meyer said. “And we don’t have the economy getting back to full employment until 2017.”
Meltzer, author of a two-volume history of the Fed from 1913 to 1986, said that officials don’t have a plan for how to withdraw their record stimulus by selling assets.
“They cannot get out front,” Meltzer said. “They talk about selling some of these bonds and mortgages to money market funds. Now that’s a smokescreen.”
“Of course they have a plan. They spent a year developing that plan, putting into practice new tools,” Meyer said. “Can they control inflation? Yes they can. As long as they can affect real interest rates they can control inflation.”
Meyer was appointed to the Fed board by President Bill Clinton and served from 1996 to 2002. He wrote about his tenure as governor at the central bank in his 2004 book, “A Term at the Fed: An Insider’s View.”
The policy-setting Federal Open Market Committee’s last meeting of this year is scheduled for Dec. 11-12 in Washington. Bernanke will hold a press conference after the gathering and participants will release their forecasts for the economy.
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