April 27, 2011

Federal Reserve Swaying to Political Pressure?

The Federal Reserve is expected this morning to announce that bond buying will stop in June. This is a mistake, says Garett Jones, a scholar at the Mercatus Center at George Mason University and an assistant economics professor at GMU.  

“The Federal Reserve is really feeling the heat of the politics here,” Jones said,  “There is a little worry about commodity inflation as well, but mostly this is a response to House Republicans and other leadership that feel the Fed is out of control.  The Fed is doing what Central Banks do: paying attention to its boss, which is Congress.”

The move to stop bond buying is premature, he continues.

“We have not engaged in bond buying long enough to really judge its effectiveness. Monetary policy affects growth with a long and variable lag. QE2 has only been in place for seven months, and we need 18 to make a sound judgment,” Jones said.

Jones predicts that QE2 will be recognized as a major contributor to the recovering economy in the future, even though many now consider it a failure.