“…should be done carefully over time, and not front-loaded on an economy that is less than robust.”
Domestically, although the immediate threats from the turn-of-the-year fiscal cliff were avoided, there still are many issues to resolve regarding the course of government spending and tax policy. The present projected path for federal debt is not sustainable and needs to be addressed. But this should be done carefully over time, and not front-loaded on an economy that is less than robust. Current estimates of the economic drag in 2013 coming from fiscal consolidation without the sequester are on the order of 1 percent, and I am concerned about the risk that Washington might jam the recovery at the line of scrimmage by piling some more unhelpful near-term fiscal restraint on top of this already sizable effect. — Charles L. Evans, President and Chief Executive Officer, Federal Reserve Bank of Chicago (February 28, 2013, speech at the CFA Society of Iowa).
Evans also discussed forward guidance pegged fairly closely to target percentages rather than as previously set to end by certain dates.
Evans’ arguments aren’t enough though to convince Richard Fisher, President, FRB Dallas. Fisher feels there’s still too much uncertainty.
“I argue it’s not because of monetary policy. We provide a lot of fuel,”. “It’s because of the uncertainty and the fog that’s been created by the fiscal authorities because people don’t know what their tax bill is going to be, what their costs are going to be.”
Note that Evans and Fisher are speaking about both monetary and fiscal policies and practices and that we don’t want to suggest that Evans would disagree with Fisher that there’s still too much uncertainty coming from the Congress. It is apparent though that they place emphasis and set priorities differently such that Evans believes tightening rates as soon as Fisher would, would be counter-productive to growth and would not increase certainty enough to offset the losses from economic slowdown or avoid perhaps too much inflation later.
Fisher isn’t the only one with concerns.
For example, Martin Feldstein, Professor of Economics, Harvard University, believes that too much accommodation from the Fed and too much deficit spending by the federal government will not be covered by the US dollar being the (or even a) reserve currency or by the lack of other safer places/currencies to hold money in future storms.
Last but not least, Nouriel Roubini, Professor, NYU’s Stern School of Business, Chairman, Roubini Global Economics, does an excellent job listing the various concerns about quantitative easing (QE) in general.