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Outside editorial: As economy slowly revives, Federal Reserve should hold off on QE3

Posted: January 25, 2012 - 1:01am

The following editorial appeared in the Chicago Tribune:

It’s starting to look like Federal Reserve Chairman Ben Bernanke has done enough to shield the U.S. economy from Europe’s trouble and put it on the road to recovery.

Will he quit while he’s ahead? He should, but he might not.

The Fed’s policymaking arm begins a two-day meeting Tuesday that some economists expect to conclude with another dose of monetary stimulus.

For those keeping track, that would be “QE3” — the third time since the recession started at the end of 2007 that central bankers have resorted to printing money through the large-scale asset purchases known as “quantitative easing.”

Money isn’t free, and the biggest cost to printing more money, economically speaking, is that it tends to drive up prices. So far, inflation in the U.S. is tame. The latest government reports show consumer prices unchanged in December, and wholesale prices down a tick. Reports showing no inflation could give the Fed cover if it wants to roll the presses.

Don’t do it. The Fed should wait and see how 2012 unfolds before it takes a chance on reigniting inflation in the medium and long term. Holding off also will give the Fed an effective response if the fragile recovery gets hit with a shock.

The obvious risk is the European debt crisis. At the moment, it looks as if European banks will avoid a devastating systemic collapse. No guarantees, however. Europe has a lot of work yet to do.

And what about less-obvious risks to economic growth? Last year’s Japanese earthquake and tsunami was a good example. What if there is military action involving Iran, or North Korea? What if the slowdown in China’s economy turns into a freefall?

The Fed needs to keep its ink in the barrel so it can pour it on if conditions demand it.

Right now, conditions don’t demand it. The United States is slowly, painfully crawling out of the economic hole it dug for itself through reckless lending.

We know: It doesn’t feel like a recovery. And it won’t feel like one until the job market picks up and the residential real estate bust subsides. The nation suffered through a brutal downturn, with the worst job losses and the slowest rebound in at least a generation.

The Fed is particularly frustrated by the dismal housing market. Through its ongoing “Operation Twist,” it is shifting its bond portfolio into longer-dated assets to help drive down mortgage rates, aiming to give real estate a boost. With the same goal in mind, its policymakers could be tempted to snap up mortgage-backed securities through a new QE3.

Yet even as housing drags down the economy, we see progress elsewhere: Companies are beginning to hire, consumer confidence has ticked up, people are buying more cars and factories are making more goods. Crucially, banks have started lending to businesses again.

After this week’s meeting, Bernanke and his fellow policymakers for the first time will publish their latest economic forecasts, as well as their predictions for the benchmark federal funds rate. The new openness from the Fed is welcome. Even if the forecasts are less than robust, knowing them should give the marketplace confidence — and, we hope, the reassurance that Fed policymakers aren’t overly eager to crank up the presses again.

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