Greenspan: Fed Tactics 'Not Having Major Effect' on Economy

Tuesday, 11 Dec 2012 05:33 PM

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The Federal Reserve's stimulus measures aren't having as strong an impact on the economy these days as people think, said former Fed Chairman Alan Greenspan.

Since the downturn, the Fed has sought to spur recovery by slashing interest rates to near zero and taken more unorthodox measures such as buying bonds like mortgage debt or Treasury holdings from banks, a stimulus tool known as quantitative easing that injects liquidity
into the economy to keep rates low and encourage investing and hiring.

Critics dub quantitative easing as printing money out of thin air that will fuel inflationary pressures down the road.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Either way, the Fed's policies aren't having much of an impact, especially while banks hold off on lending out all that fresh money.

"I've not commented about Fed policy since I got out of office, but I will say this: that whatever the Fed is doing, whether you like it or not, it's not actually, in my judgment, having a major effect," Greenspan told CNBC.

"The issue here is that they have created a very large expansion to the balance sheet that's ended up as reserves on the asset side out of all the commercial banks and savings banks and that's not being re-lent. And unless and until it is re-lent, it will not have a significant impact on the
economy," Greenspan added.

"I think the Fed is not as big a player as most people think."

The Fed, which will wrap up a two-day policy meeting Wednesday, has acquired trillions of dollars in assets via past rounds of quantitative easing, and many are wondering how the U.S. central bank will unwind those assets and mop up liquidity to stave off inflation should it come to that.

The Fed must avoid raising interest rates too quickly when the time comes to tighten monetary policy.

The chances of markets roiling are significant, Greenspan said.

"You don't get markets turning gradually; they don't give you advance notice," he told the network.

"I've been through innumerable cases when things looked extraordinarily sanguine until it wasn't."

The Fed is currently running an open-ended round of quantitative easing, under which the U.S. central bank buys $40 billion in mortgage-backed securities a month from banks to jolt the economy via fresh liquidity injections designed to keep rates at rock-bottom levels.

Separately, the Fed is also running its so-called Operation Twist stimulus program, under which the Fed sells $45 billion a month in short-term Treasuries in the open market and simultaneously buys the same amount in long-termer U.S. government debt.

Unlike quantitative easing, Operation Twist does not expand the Fed's balance sheet, but many economists feel a sluggish recovery and concerns fiscal uncertainty will drag will prompt the Fed to let Operation Twist expire this month and replace it with added outright quantitative easing.

"It's most likely they're going to convert Operation Twist into some kind of outright purchase program," said Tim Duy, an economist at the University of Oregon who runs a blog popular among Fed watchers, according to CNNMoney.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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