News Column

Fed Response to Short-term Data Won't Solve Long-term Problem: Economist

July 11, 2012

The U.S. Federal Reserve has been excessively attentive to the short-term economic data volatility, which alone can't solve its economic problem, a distinguished economist said on Tuesday.

"By allowing its monetary policy to be influenced by elected politicians and market speculators, the Federal Reserve is putting its independence at risk," said Allan H. Meltzer, professor of political economy at Carnegie Mellon University, in an article carried in The Wall Street Journal.

He said the U.S. central bank is also neglecting basic economics, but paying too much attention to the short-term economic data fluctuations, over which it has little influence.

"Executing monetary-policy changes in response to transitory data is a mistake," he said, explaining that data reported are subject to revision and actions taken today may have their main effects much later, but by then the data often support a very different story.

"Rule-based monetary policy brought us a far better economic outcome than discretionary ups and downs," he added.

Meltzer also argued that the country's sluggish growth and stubbornly high unemployment rate was not caused by, nor could it be cured by, monetary policy.

"With mortgage rates lower than ever and housing showing very sluggish recovery, what can be gained by dropping the mortgage rate another small fraction? Business investment is held back by uncertainty," he said.

He cited the second round of bond purchasing launched by the Fed in 2010 as an example to justify his point that further monetary easing won't do much good. He said that in response to market jitters about double-dip recession and deflation, the Fed added 600 billion U.S. dollars to banks' reserves by buying up treasury bonds and mortgage-backed securities, but till now 500 billion dollars of those reserves remain on bank balance sheets.

Meltzer believed the policies that are really needed are on the fiscal side. "Instead of more short-term stimulus, we need a government that puts us on a path toward a balanced budget over time, mainly by reducing spending," he said.

Source: (c) 2012 Xinhua News Agency - CEIS. Provided by ProQuest LLC. All rights Reserved.

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