BEIJING (MNI) – The Federal Reserve’s decision to introduce another
$600 billion in quantitative easing last week was neither an
unconditional nor an open-ended commitment, and policy should be changed
if the outcome proves satisfactory, disappointing or if risks emerge,
board member Kevin Warsh argued in a Wall Street Journal op/ed published
Monday.
Warsh said sustained lower risk-free rates and higher equity prices
could boost household and business balance sheets, strengthening the
economy in turn.
But he also said evidence that recent weakness in the dollar,
rising commodity prices and other indicators feed into final prices
could mean “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 – we
would have cause to consider the path of policy. This is truer still if
inflation expectations increase materially,” he said.
The Fed has been criticized globally since deciding on another $600
billion in quantitative easing last week, but Warsh suggested that the
program may not be extended further, as some in the market took the FOMC
meeting statement to suggest.
“The FOMC did not make an unconditional or open-ended commitment. I
consider the FOMC’s action as necessarily limited, circumscribed and
subject to regular review,” he said.
“Policies should be altered if certain objectives are satisfied,
purported benefits disappoint, or potential risks threaten to
materialize.”
Warsh said that the Fed’s increased presence in the Treasury market
poses “nontrivial risks that bear watching.”
“As the Fed’s balance sheet expands, it becomes more of a price
maker than a price taker in the Treasury market,” he said. “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.”
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