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US Fed’s QE Policy Is Distorting The US EconomyPosted by: : Paul Ebeling (http://www.livetradingnews.com/paul-ebeling) Posted on: February 7, 2014
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US Fed’s QE Policy Is Distorting The US Economy
The US Federal Reserve’s quantitative easing (QE) program is damaging for the economy, says Campbell Harvey, an international business professor
at Duke University’s business school.
“I don’t agree that there should be a QE whatsoever,” Mr. Harvey said in a interview Thursday. ”It is massively distorting for the US and the world economy
to have real interest rates that are negative.”
The low rates created by QE have pushed the USD down, distorting trade flows and misallocating resources, Mr. Harvey says. “We’ve seen a surge in
US exports,” he says. “The reason for the surge is that the USD is artificially cheap.”
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That works out fine in the short term, Mr Harvey says. But, “in the long term, we will pay the price, because we’re seeing right now growth rates in
emerging markets slowing down,” he said. “That will come back and bite the US.”
The Fed doesn’t need to have a $4-T balance sheet, Mr. Harvey says. “That is going to create problems in the future. So taper, actually, for me, I would
prefer that they just end it and start to get their balance sheet in order. If we leave it, the longer it goes, the worse it’s going to get.”
Much attention is focused on the size of Fed tapering. But, “what we should be focusing on” given the explosion of the Fed’s balance sheet and the
continuation of negative real interest rates is “what about the cost?” Mr. Harvey said. “The cost is going to come, and it’s just a matter of time that we have
to pay.”
When banks start to repatriate the more than $2-T that they have sitting at the Fed, that will likely lead to a burst of inflation, Mr. Harvey said. “That is the
main challenge.”
New Fed Chairman Janet Yellen has extremely little room to maneuver policy, Mr. Harvey says.
“Given that we’ve had a long tenure of Bernanke, her calculus right now is to continue on the path that is set out, have a minimal amount of surprise and
hope that the US economy continues to grow at 3 or 3% +,” he said.
Growth is the only escape from such a huge balance sheet, Mr. Harvey says. “So if there’s enough growth, that balance sheet can be gradually reduced
without having an inflationary impact,” he said.
“If that growth slows and that money is repatriated, it is like a helicopter drop of cash on the economy, and there could be explosive inflation.”
Stay tuned…
HeffX-LTN
Paul Ebeling
Paul Ebeling (http://www.livetradingnews.com)Pattern Recognition Analyst, equities, commodities, forex
Paul Ebeling is best known for his work as writer and publisher of “The Red Roadmaster’s Technical Report” on the US Major
Market Indices™, a highly-regarded, weekly financial market letter, where he enjoys an international audience among opinion
makers, business leaders, and respected organizations. Something of a pioneer in online stock market and commodities
discussion and analysis, Ebeling has been online since 1994. He has studied and worked in the global financial and stock
markets since 1984.
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