The U.S. Federal Reserve is close to embarking on another controversial round of monetary easing (WSJ) next week, amid fears of deflation and a weakening economy. The hope is to spur more investment and spending to bolster the recovery. But the efficacy of the policy--which aims to drive up the prices of long-term bonds in order to push down long-term interest rates--is being hotly debated among economists and Fed officials. Some Fed officials are pushing for an aggressive stimulus (Reuters), while others are skeptical of the idea altogether. The market expectation is for the Fed to initially commit to buying at least $500 billion in Treasury debt over five months. Markets could interpret the announcement as an open-ended commitment by the Fed to boost the recovery, driving up U.S. stocks and government bonds and pushing down the U.S. dollar. Some Fed officials are concerned (FT) about the difficulty of eventually selling the assets they buy, the risk of distorting the Treasury market, and the political implications of moving into fiscal policy.
In a recent report, Goldman Sachs economists Jan Hatzius and Sven Jari Stehn estimate the Fed may need to buy $4 trillion worth of assets like Treasury securities to get the economy rolling again. They say the Fed's policy is not loose enough.
In the Financial Times, Frederic Mishkin says the Fed needs to adopt a specific inflation target to anchor long-run inflation expectations and decrease the threat of deflation.
This CFR Analysis Brief examines the debate about monetary, currency, and trade policies of G20 countries, and their effect on the global economic recovery.http://www.cfr.org/about/newsletters/editorial_detail.html?id=2244