Tags: Taylor | Fed | easing | economy

Stanford’s John Taylor: Fed Easing Hurts Economy

Tuesday, 29 Jan 2013 09:52 AM

By Dan Weil

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The Federal Reserve’s massive easing program has helped keep economic growth stuck around 2 percent, says John Taylor, former Treasury undersecretary for international affairs.

“At the very least, the policy creates a great deal of uncertainty,” he writes in The Wall Street Journal. When the Fed finally reverses its easing policy, uncertainty will reign.

The Fed may sell the securities that have built up on its balance sheet too slowly, which would force bank reserves into the economy, says Taylor, now a Stanford University economist. But if asset sales are too fast, interest rates could go sky high, causing a recession.

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion

In addition, “the Fed's current zero interest-rate policy creates incentives for otherwise risk-averse investors — retirees, pension funds — to take on questionable investments as they search for higher yields.”

The Fed’s easing also pushes foreign central banks to do the same to keep their currencies from rising, which would hurt their exports.

“More broadly, the Fed's excursion into fiscal policy and credit allocation raises questions about its institutional independence and accountability,” Taylor writes.

“If the economy surprises a bit on the upside this year, we can hope that it results in fewer interventions by the Fed — perhaps a halt to asset purchases. This will bolster growth and help put the economy on a sustained recovery path.”

If former Fed Vice Chairman Alan Blinder is right, Taylor will remain displeased for a while.

“It’s never too soon to start thinking about [a reversal of the easing.] But I’d be very surprised if the Fed even starts on its exit in 2013,” Blinder tells Yahoo. “I wouldn’t even bet on 2014.”

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion

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