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.

    Tweet This

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

    Tweet This

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

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman

What's new on AEI

Love people, not pleasure
image Oval Office lacks resolve on Ukraine
image Middle East Morass: A public opinion rundown of Iraq, Iran, and more
image Verizon's Inspire Her Mind ad and the facts they didn't tell you
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Monday, July 21, 2014 | 9:15 a.m. – 11:30 a.m.
Closing the gaps in health outcomes: Alternative paths forward

Please join us for a broader exploration of targeted interventions that provide real promise for reducing health disparities, limiting or delaying the onset of chronic health conditions, and improving the performance of the US health care system.

Monday, July 21, 2014 | 4:00 p.m. – 5:30 p.m.
Comprehending comprehensive universities

Join us for a panel discussion that seeks to comprehend the comprehensives and to determine the role these schools play in the nation’s college completion agenda.

Tuesday, July 22, 2014 | 8:50 a.m. – 12:00 p.m.
Who governs the Internet? A conversation on securing the multistakeholder process

Please join AEI’s Center for Internet, Communications, and Technology Policy for a conference to address key steps we can take, as members of the global community, to maintain a free Internet.

Event Registration is Closed
Thursday, July 24, 2014 | 9:00 a.m. – 10:00 a.m.
Expanding opportunity in America: A conversation with House Budget Committee Chairman Paul Ryan

Please join us as House Budget Committee Chairman Paul Ryan (R-WI) unveils a new set of policy reforms aimed at reducing poverty and increasing upward mobility throughout America.

Thursday, July 24, 2014 | 6:00 p.m. – 7:15 p.m.
Is it time to end the Export-Import Bank?

We welcome you to join us at AEI as POLITICO’s Ben White moderates a lively debate between Tim Carney, one of the bank’s fiercest critics, and Tony Fratto, one of the agency’s staunchest defenders.

No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.