Thursday, January 03, 2013

Feldstein Says The Fed Is Blowing It

I want to call your attention to an interesting op-ed written in today's Wall Street Journal by Martin Feldstein, a noted economist and professor at Harvard University. Feldstein argues that the Federal Reserve's easy-money policies are setting the economy up for more difficult times in the future. Feldstein warns that interest rates will surge when the Fed stops buying all those Treasury and mortgage-backed securities, which it eventually must. He further argues that the Fed's policies are inflationary. Because the banks have much more reserves than they are legally required to hold, inflation will rise once they start lending the money aggressively in response to aggregate demand. In addition, the Fed's dual mandate (i.e., price stability and full employment) will prevent it from acting quickly enough to stem inflation. Finally, Feldstein argues that the Fed's policies take the heat off Congress by allow it to ignore the serious problems of high debt and large deficits that plague our economy. The longer these problems are ignored, the more difficult they will be to fix.

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