Start tapering now to prevent bubbles
Letter to the editor

Article Highlights

  • Over the past 5 years, the Fed’s balance sheet has quadrupled to its present size of $3.5 trillion.

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  • The Fed continues to grow at a monthly rate of $85 billion.

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Sir, So soon after the devastating bursting of the largest US housing and credit market bubble in 2008-09, one has to be surprised that Adam Posen is now advocating the indefinite continuation of the Federal Reserve’s quantitative easing programme at its present pace without as much as a reference to the risk of creating global asset-price and credit market bubbles (“Why has the Fed given up on the unemployed?”, August 21). This leads him to the erroneous conclusion that the costs of pushing a bit too far on monetary policy to reduce unemployment are small and reversible.

Over the past five years, the Federal Reserve’s balance sheet has quadrupled to its present size of $3.5tn, and it continues to grow at a monthly rate of $85bn. This has spawned sharp increases in global equity prices and a dramatic narrowing in both corporate high-yield and sovereign bond spreads that have become largely disconnected from underlying economic fundamentals.

Consistent with its dual mandate of price stability and maximum employment, the Federal Reserve would be well advised to start tapering now for fear of further inflating global asset and credit market bubbles. From its own painful experience, the Fed should know by now that creating bubbles to reduce short-term unemployment is hardly consistent with minimising unemployment over the longer haul.

Desmond Lachman, American Enterprise Institute, Washington DC, US

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About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202.862.5862
    Email: emma.bennett@aei.org

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