I can’t believe that the Federal Reserve’s QE2 program seeking to increase inflation will have a happy ending if it is carried out. Yesterday the Wall Street Journal posted an open letter to Ben Bernanke that is itself a signal event:
We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.
We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.” In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.
We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.
The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.
Among the signatories to the letter are Cliff Asness, Michael Boskin, Richard Bove, and 18 other prominent economists, writers and former officials.
The Journal has also posted the Fed’s response to this letter. In its response, the Fed claims to be acting “[i]n light of persistently weak job creation and declining inflation…” The Fed also claims that it “is confident that it has the tools to unwind these policies at the appropriate time.”
UPDATE: Matthew Continetti provides a useful roundup of commentary in “The war over QE2.”