Fed’s Best Bet Is To Sit On It Hands

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Many of Ben Bernanke’s fellow Fed governors are sullen if not mutinous about the decision to buy in as much as $600 billion in US paper. Some consider it a road to inflation. Others believe that it will do nothing other than to buy sovereign debt for which there is potentially dwindling demand from foreign governments like China.

Bernanke may be saved by the extension of the Bush tax cuts. Many economists believe that the lower levies on individuals and corporations will cause renewed consumer spending, hiring, and capital purchases. It is just as likely that both individuals and companies will pocket the money in rainy day funds in case there is another economic slowdown.

Bernanke has a path open to him that he has not taken in the last few months. He can stay off “60 Minutes” and stop his barn storming. He can let the Fed’s success or lack thereof to speak for itself. So far, its bond buying has not brought down Treasury yields. Global capital investors are still concerned about the growing size of US deficits. Moody’s even said that the lack of financial discipline by the Congress and Administration could cost the US it Aaa rating.

Obama and the Congress are in the spot light or perhaps head lights. The mistakes or successes of economic policy are now belong to them. The focus is on whether low taxes produce increased economic activity. If so, the Fed will look like it was early into the market with its $60o billion program and will have done no harm. If the Congressional programs fail, the Fed can always decide whether to step up again, and perhaps take a new beating.

Douglas A. McIntyre