The Corner

QE3: Unwise and Unnecessary

The Federal Reserve is shooting blanks as far as job creation goes. And the market knows it.

The effectiveness of the Fed’s unprecedented monetary morphine is rapidly waning. This makes the Fed’s anticipated initiation of a third round of quantitative easing (QE3) on Thursday all the more baffling. At a time of historically low interest rates, trillions of dollars of excess bank reserves parked at the Fed, and U.S. companies with an equally large amount of cash holdings, most economists believe yet another round of QE will have little effect on either growth or the unemployment rate.

The Fed’s action would be more fearful than reasoned. The fact that this option is still on the table is a stunning indictment of the failure of President Obama’s economic policies three years after the recession officially ended.

Thirty-five years ago, Congress gave the Fed a dual mandate to achieve both stable prices and maximum employment. Pursuing the employment half of its dual mandate, the Fed slashed interest rates and acted aggressively as lender of last resort during 2008.

In the three and a half years since the Fed hit the limit of traditional monetary policy, the Fed has repeatedly reached into its bag of tricks to bolster our anemic economic recovery. First, the Fed purchased hundreds of billions of dollars of mortgage-backed securities (QE1) and then hundreds of billions of dollars in U.S. Treasuries (QE2). More recently via “operation twist,” the Fed has pushed down longer-term interest rates and communicated its intent to keep shorter-term interest rates near zero through 2014.#more#

Yet, despite the Fed’s best attempts, the current economic recovery ranks dead last among the ten recoveries lasting more than one year since World War II — both in terms of output growth and job creation. If the Fed’s first two rounds of quantitative easing did not put us on the path to strong growth, why should Americans expect a third round to be any different?

In fairness to the Fed, monetary policy is not the primary cause of this weak recovery. Monetary policy cannot stimulate long-term growth and job creation.

President Obama’s “government made America great and government can make it great again” policies have failed spectacularly. Working his way through an ever evolving list of those who deserve blame for his lack of success, he’s lingering on congressional Republicans. But the president had a Democratic Congress for his first two years, in which he could and did pass almost any policy he liked. Laws and executive orders adopted under Democratic control only increased federal debt and amplified economic uncertainty. In the last two years, congressional Republicans urged a different course, but unlike President Clinton, the current president hasn’t been receptive to alternative policies since his party lost the midterm election.

In this climate, the Fed decided once again to take extraordinary actions to boost America’s economy. But will additional easing do much good?

The problems facing the U.S. economy are not illiquidity or high interest rates that monetary easing could alleviate. There is plenty of liquidity — U.S. non-financial corporations are sitting on $1.5 trillion in cash and near equivalents, and U.S. banks have $1.5 trillion in excess reserves. Borrowing costs are down, with interest rates trending just above historical lows.

Consequently, many economists have concluded that further Fed action will not do much good. Recently, the private forecasting firm, Macroeconomic Advisers, estimated that an additional $600 to $750 billion of quantitative easing would, over the next two years, add a meager one-fourth of a percentage point to real GDP growth and lower the unemployment rate by roughly 0.2 percentage points. That equates to roughly one month of healthy job creation over the next two years at a cost of $2 million a job.  

America’s job creators are sidelined not because the economy hasn’t received enough monetary morphine, but because uncertainty over Washington’s economic policies is as high as it has ever been. Fear of Obamacare and the looming tax bomb are causing businesses along Main Street to take a wait-and-see approach to new hiring. Meanwhile, new regulations related to Obamacare, Dodd-Frank, and domestic energy production are hampering the ongoing operations of business across America. And the failure of President Obama and congressional Democrats to address the federal government’s gloomy fiscal prospects has extended the cloud of uncertainty for years to come.

Although the Fed feels compelled to act because President Obama’s policies have created strong economic headwinds, QE3 would heighten the risks to America’s economy. Further expansion in the monetary base would make the Fed’s eventual “exit strategy” more difficult to execute, risking future price inflation.

What’s more, if QE3 commits the Fed to purchase additional mortgage-backed securities, QE3 would put the Fed in the position of picking winners and losers in credit markets. Credit allocation politicizes the Fed and will undermine its independence.

It’s time for the Fed to stop. Chairman Bernanke should look President Obama and Congress in the eye and tell them the Fed has done all it can to boost growth—perhaps too much. 

He should state clearly and unequivocally that if the president wants stronger job creation now — before the election — then he should work with Congress to remove the tax, spending, regulatory, and health-care roadblocks jackknifed across America’s economy now.

Monetary policy can’t solve what poor fiscal policy has created.  

— Representative Kevin Brady (R., Tex.) is Vice Chairman of the Joint Economic Committee of the U.S. Congress and author of the Sound Dollar Act, a measure that would restrict the role of the Federal Reserve to guarding against inflation.


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