More critics to add to the list. These are a little closer to home, however.
First up, Dallas Fed President Richard Fisher’s address to the Associate for Financial Professionals on Monday.
Via IFR:
(emphasis throughout ours)
Fisher looked to the example of the Bank of England, another central bank engaged in quantitative easing, but found the comparison with the situation in the United States to be weak, as “the Bank of England is offsetting an announced fiscal policy tightening that out-Thatchers Thatcher. This is not the case here. Here we suffer from fiscal incontinence and regulatory misfeasance. If this were to change, I might advocate for accommodation.” Hence, Fisher suggest, if the Fed is not to take his advice in avoiding quantitative easing, the U.S. fiscal authorities should take advantage of the accommodative policy to implement a similar fiscal retrenchment. Fiscal policymakers would have more room to act, as “for the next eight months, the nation’s central bank will be monetizing the federal debt“.
“He largely reiterated his previous arguments against further accommodation, saying it would “lead to a declining dollar, encourage further speculation, provoke commodity hoarding, accelerate the transfer of wealth from the deliberate saver and the unfortunate, and possibly place at risk the stature and independence of the Fed.” Taking such risks would be unnecessary, he argued, as “more things are moving in the right direction than the wrong direction,” and that the landscape again sees “green shoots.”
And next ]Governor Kevin Warsh who told the Securities Industry and Financial Markets Association on Monday that the Fed was not a repair shop.
The Federal Reserve is not a repair shop for broken fiscal, trade, or regulatory policies. Given what ails us, additional monetary policy measures are, at best, poor substitutes for more powerful pro-growth policies. The Fed can lose its hard-earned credibility–and monetary policy can lose its considerable sway–if its policies overpromise or underdeliver. We should be leery of drawing inapt lessons from the crisis to the current policy conjuncture. Lender-of-last-resort authority cannot readily be converted into fighter-of-first resort power.
But, expanding the Fed’s balance sheet is not a free option. There are significant risks that bear careful monitoring by the FOMC. If the recent weakness in the dollar, run-up in commodity prices, and other forward-looking indicators are sustained and passed along into final prices, the Fed’s price stability objective might no longer be a compelling policy rationale. In such a case–even with the unemployment rate still high–the FOMC would have cause to consider the path of policy. This is truer still if inflation expectations increase materially. And if the Fed’s holdings work predominantly through the so-called portfolio balance channel, the cessation of purchases should not reverse any benefits attained.
The Fed’s increased presence in the market for long-term Treasury securities also poses nontrivial risks. The Treasury market is special. It plays a unique role in the global financial system. It is a corollary to the dollar’s role as the world’s reserve currency. The prices assigned to Treasury securities–the risk-free rate–are the foundation from which the price of virtually every asset in the world is calculated. As the Fed’s balance sheet expands, it becomes more of a price maker than a price taker in the Treasury market. And if market participants come to doubt these prices–or their reliance on these prices proves fleeting–risk premiums across asset classes and geographies could move unexpectedly. The shock that hit the financial markets in 2008 upon the imminent failures of Fannie Mae and Freddie Mac gives some indication of the harm that can be done when assets perceived to be relatively riskless turn out not to be.
And overseas–as a consequence of more-expansive U.S. monetary policy and distortions in the international monetary system–we see an increasing tendency by policymakers to intervene in currency markets, administer unilateral measures, institute ad hoc capital controls, and resort to protectionist policies. Extraordinary measures tend to beget extraordinary countermeasures. Second-order effects can have first-order consequences. Heightened tensions in currency and capital markets could result in a more protracted and difficult global recovery. These, too, are developments that the FOMC must monitor carefully.
Related link:
It’s a QE2 backlash, doncha know – FT Alphaville