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Jane Richey / June 12, 2012

Economy Doesn’t Need More Fed Action

Some Federal Reserve Bank presidents and governors are talking about the possibility of further action to encourage growth in the economy. What planet are they on?

Fed action can only influence nominal variables at this point in the cycle — not real variables such as employment, production and real economic growth. Everyone at the Fed knows that. Excess reserves at depository institutions currently total $1.46 trillion.

In August 2008 that number was about $2 billion. QE1 was implemented in response to the Lehman bankruptcy and excess reserves reached $1.1 trillion by November 2009. Then along came QE2 in November 2010.

The positive short-term effects of QE1 on real variables petered out in 2010 and any positive effects of QE2 were more than offset by the adverse health and regulatory policies passed and implemented in 2010.

Chairman Bernanke, in testimony last week, seemed to back away from recent comments by Janet Yellen, the Fed’s vice chairperson, with her supportive comment on needing more monetary accommodation.

Mr. Bernanke seemed to imply that the Fed may act only if a disorderly breakup of the euro occurs and transmits a major financial shock to the U.S. financial system. The Fed would be making a major mistake by acting at this time.

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Filed Under: Constitutionally Limited Goverment, Fiscal Responsibility, Free Markets Tagged With: Ben Bernanke, Federal Reserve, Lehman, mortgage, QE1

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