Roubini: Fed Faces 'Treacherous' Path in Exiting its QE

Wednesday, 19 Jun 2013 07:09 AM

By Dan Weil

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The Federal Reserve has a difficult balancing act to perform in pulling back from its massive easing program, say Nouriel Roubini, a New York University economist, and Ian Bremmer, president of Eurasia Group, a consulting firm.

"The weak real economy and job market, together with high debt ratios, suggest the need to exit monetary stimulus slowly," the duo writes in Institutional Investor. "But a slow exit risks creating a credit and asset bubble as large as the previous one, if not larger.

"In the previous tightening cycle, which began in 2004, it took the Fed two years to normalize the policy rate," they note. "This time the unemployment rate and household and government debt are much higher," the pair adds.

Editor’s Note:
Put the World’s Top Financial Minds to Work for You


"If financial markets are already frothy, consider how frothy they will be when the Fed starts tightening — and then when the Fed finishes tightening."

The economy grew 2.4 percent in the first quarter, and unemployment stood at 7.6 percent in May.

The pursuit of economic stability may again lead to economic instability, the economists say.

"The Fed's (and other central banks') liquidity injections are not creating credit for the real economy, but rather boosting leverage and risk taking in financial markets," Roubini and Bremmer explain.

"Thus the exit from the Fed's QE [quantitative easing] and zero-interest-rate policies will be treacherous," they maintain.

"Exiting too fast will crash the real economy, while exiting too slowly will create a huge bubble and then crash the financial system."

The Fed begins a two-day policy meeting Tuesday. It is buying $85 billion of Treasurys and mortgage-backed securities a month and has set the federal funds rate target at zero to 0.25 percent.

Fed Chairman Ben Bernanke "is likely to signal" Wednesday that the Fed "is close to tapering down" its QE, according to Robin Harding of the Financial Times.

Bernanke will make that indication at his press conference after the Fed's policy meeting ends, Harding predicts. But he thinks Bernanke will "balance that by saying subsequent moves depend on what happens to the economy."

Editor’s Note: Put the World’s Top Financial Minds to Work for You

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