March 12, 2013
ACCORDING to Ben Bernanke, the Chairman of the Federal Reserve, the pulling back on aggressive policy measures too soon would pose a real risk of damaging a still-fragile recovery, writes Dr Frank Shostak for the Cobden Centre.
The Fed Chief is of the view that for the purposes of financial stability a continuation of the central bank’s aggressive stimulus conducted through purchases of Treasury and mortgage securities remains the optimal approach.
In response to the financial crisis and the deep recession of 2007-9, the Fed not only lowered official rates to effectively zero, but also bought more than $2.5 trillion in assets in an effort to keep long-term rates low.
But is it true that a loose monetary stance provides support to economic activity? Furthermore, if this is the case then why after such an aggressive lowering of interest rates and massive expansion of the Fed’s balance sheet does the economic recovery remain fragile?
Surely if loose monetary policy could revive economic activity then a very loose policy should produce very strong so called economic growth – so why hasn’t it happen this way?
This article was posted: Tuesday, March 12, 2013 at 11:12 am