More Harm Than Good: Republican Leaders Voice Fears Over Fed Plan

By Jared

Nov 17, 2010 2:15pm

ABC News’ Matthew Jaffe reports: Republican leaders in the House & Senate today voiced concerns about the Federal Reserve’s new $600 billion monetary stimulus plan, known as “QE2″, short for “quantitative easing.” In a letter to Fed chairman Ben Bernanke, top Senate Republicans Mitch McConnell and Jon Kyl and top House Republicans John Boehner and Eric Cantor said the plan creates “significant uncertainty” about the strength of the dollar, “impairs US trade relations,” and “erodes confidence in the economic outlook.” “While intended to improve the short-term growth of the U.S. economy and help maintain a stable price level, such a measure introduces significant uncertainty regarding the future strength of the dollar and could result both in hard-to-control, long-term inflation and potentially generate artificial asset bubbles that could cause further economic disruptions,” the GOP lawmakers wrote to Bernanke. Noting that the plan has already “generated increased criticism and action from other central banks and governments,” the lawmakers warned that “any action taken by our nation or foreign nations that impairs US trade relations at a time when we should be fighting global trade protection measures will only further harm the global economy and could delay recovery in the United States.” “Perhaps most damaging, we believe that QE2 is giving the impression that the Federal Reserve will keep making new and different attempts to boost the short-term prospects for the economy,” they concluded. “Our long-term growth depends on restoring confidence and certainty in our fiscal, regulatory, and trade policies — and not on government’s willingness to engage in additional stimulative measures. When asset prices increase due to anticipated Federal Reserve policy rather than economic fundamentals, it increases the potential for speculative action and erodes confidence in the economic outlook, making it more difficult to generate sustainable growth.” The GOP lawmakers are only the latest in a growing chorus of criticism against the central bank’s program. Countries such as China and Russia initially voiced concerns about the plan, followed swiftly by a wide range of Republicans. Former House Speaker Newt Gingrich told ABC’s George Stephanopoulos last Tuesday on “Good Morning America” that Bernanke was “fundamentally misreading the economy” in enacting the program. Sarah Palin’s called for the Fed to “cease and desist” with its new program, warning that the Fed “shouldn’t be playing around with inflation.” Even members of the Fed itself have voiced skepticism about the plan. Kevin Warsh, a member of the Fed’s board of governors wrote in the Wall Street Journal that “the Fed can lose its hard-earned credibility – and monetary policy can lose its considerable sway – if its policies overpromise or under-deliver.” And Richard Fisher, the Fed’s top official in Dallas, warned that the plan could be the “wrong medicine,” lead to a weaker dollar, and cause higher inflation. Bernanke recently made the case for the program in an opinion piece published in the Washington Post, explaining that the new money – injected into the economy through a program which will buy up Treasury bonds during the next eight months – can reduce borrowing costs for American consumers and businesses, while also lowering interest payments for people and businesses with lots of money in savings. The Fed boss deflected fears that the plan would result in higher inflation as “overstated.” “Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation,” Bernanke said. “We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time. The Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable.” –Matthew Jaffe

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