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The $600 Billion Gamble

Written By Brian Hicks

Posted January 12, 2011


snake eyes

I’ve spilled so much ink on QE2 at this point that I must be beginning to sound like a broken record.

So I’ll let this story speak for itself….

From Reuters by Jonathan Spicer entitled: Fed’s bond-buying could soon backfire: Plosser

The U.S. Federal Reserve’s aggressive bond-buying plan could soon backfire unless the central bank gradually changes course to head off inflation, a top Fed official known for his hawkish stance said on Tuesday.

Philadelphia Federal Reserve Bank President Charles Plosser said the $600-billion quantitative easing plan, known as QE2, would need to be reconsidered if the U.S. economy’s current “moderate recovery” picks up steam.

The prospect of sustained price deflation — a worry for Fed Chairman Ben Bernanke and other backers of the controversial QE2 plan — is highly unlikely in part because the Fed’s massive reserves will eventually flow out into the economy, Plosser added.

“If the economy begins to grow more quickly and the sustainability of this recovery continues to gain traction, then the purchase program will need to be reconsidered along with other aspects of our very accommodative policy stance,” Plosser said in a speech to the Risk Management Association.

“The aggressiveness of our accommodative policy may soon backfire on us if we don’t begin to gradually reverse course,” he said.

It comes as recent data show the U.S. economy is slowly recovering, but also as Fed officials increasingly rally behind QE2, which in early November set the Fed to purchasing Treasury securities in an effort to rejuvenate that recovery.

While some have credited QE2 for having already played a role in the rebound, Plosser said that argument likely “stretches things.”

Nothing more than a $600 billion gamble…Don’t you just love the Fed?

Related Articles:

Hoenig: QE2 May Lead to “future instability”

Hoenig: QE2 Won’t Work

Hoenig: Let Troubled Banks Fail

Jim Grant on the Fed’s “Mission Creep”

Jim Grant: “The Fed is out of its lane” 

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