Why the Fed Should Not Do QE3
In his recent speech at the Jackson Hole economic symposium, Federal Reserve Chairman Ben Bernanke made some interesting comments in regards to monetary policy. Following these remarks, gold moved up strongly, indicating that the market’s interpretation was that the Federal Reserve was indeed going to enact further stimulative monetary policy, also known as quantitative easing #3 (QE3). However, I don’t think it’s clear from the speech or recent events as to why now is the best time to use this monetary policy tool.
On the one hand, the Federal Reserve chairman did outline several reasons not to enact further monetary stimulus. This includes, the text reads, “the use of nontraditional policies involves costs beyond those generally associated with more-standard policies. Consequently, the bar for the use of nontraditional policies is higher than for traditional policies.”
The costs associated with additional nontraditional monetary policy actions by the Federal Reserve are rising and the benefits are diminishing, this we all know. As the Federal Reserve chairman then stated, the bar for using said policies is set higher. So what this could mean is that it takes more stress, such as another financial crisis, to enact further monetary policy action. As of today, we are certainly not in a financial crisis as we were several years ago. At that time, there was a massive liquidity crunch and the Federal Reserve appropriately acted by allowing monetary policy to ease and reduce the stress level. Currently there is no liquidity crunch. In fact, it is the exact opposite: there is more than enough money in the system. Adding $500 billion won’t help increase the velocity of money.READ MORE >>> http://www.investmentcontrarians.com/debt-crisis/why-the-fed-should-not-do-qe3/596/