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News Analysis: Plans for Fed easing gather steam, but economists mixed over impacts
Date: 2010/10/20 Click: 1709
U.S. Federal Reserve Chairman Ben Bernanke on Friday indicated the Fed could conduct another round of quantitative easing -- purchasing U.S. treasury bonds by printing money in a bid to stimulate growth -- but is weighing the risks to determine how large the program should be.

But some critics blasted any plans of easing whatsoever, saying the economy is not weak enough to warrant more government intervention and that continuing such policies could add to the ballooning U.S. deficit -- which hit 1.3 trillion U.S. dollars on Friday -- and weaken the U.S. dollar.

In a speech at the Federal Reserve Bank of Boston, the Fed chief noted that high unemployment -- currently at 9.6 percent and lingering near the double-digits for some time -- continues unabated, arguing that low inflation and a sluggish housing market indicate that more easing is necessary.

Indeed, those factors have ratcheted up the pressure on the Fed to open the spigot to boost growth, and it is widely believed that the U.S. central bank is set to announce another round of easing at its meeting at the start of next month.


There are many arguments against more Fed easing, and some economists argue that, in a worst case scenario, easing could create another asset bubble that could pop with a force greater than the housing bubble that prompted the latest global recession.

Peter Schiff argued in a recent article in Forbes magazine that easing has only postponed economic pain, and contended that the right choice is to reverse course and allow the recession to run its course.

Failure to do so will cause the dollar to spiral downward, consumer prices to skyrocket and the jobless rate to spike, he contended.

Robert Johnson, associate director of economic analysis at Morningstar, an independent research provider, argued that the Fed needed to step back at this point. More easing would be a mistake, and the economy was not weak enough to warrant such a move, he said.

"Now people are thinking 'maybe I shouldn't cut my budget because I might get more stimulus money from the government,'" he said.

The government should instead focus on the long term, he said.
"Clearly we need to be not looking at 'let's get growth up to 3 percent instead of 2 percent next quarter," he said.

Of greater importance was whether the right tax policies were in place and whether people were being retrained to compete in tomorrow's economy, he said.

"In California, construction workers are at 20 percent unemployment," he said.

"How we are going to retrain and deal with those people is certainly a key element of how we are going to succeed over the next 10 years. What type of incentives do we put in place?"


Still, Federal Reserve Bank of Boston President Eric Rosengren said on Thursday that more easing could help reduce the unemployment rate.
"What additional quantitative easing would potentially do is bring down the unemployment rate faster than it otherwise would come down," he said in an interview with CNBC, adding that the idea was to stimulate demand.


More easing could also weaken the U.S. dollar, which is a point of contention among many economists, with some favoring a strong dollar policy and others arguing that a weaker greenback will benefit the United States by helping to boost exports.

Constance Hunter, chief economist at Aladdin Capital Holdings, said the U.S. current account was being corrected by a weaker dollar, but one danger lay in whether other nations followed the U.S. lead in devaluing the greenback.

If one country devalues its currency, it can have a number of benefits, such as inflating away debt or jump starting the economy. But if every country engages in competitive devaluation, it could cause deflation.

"We are certainly on the precipice of competitive devaluation," she said.

Bernanke said chronically high unemployment could not only threaten a sustained recovery but could lead to deflation. Deflation can be worse than inflation and trickier to escape: as prices deflate, companies make less money and can afford to hire fewer workers. That causes unemployment to spike, and jobless consumers spend even less, reinforcing the cycle.
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