Monetary Stimulus Requires Prudence

U.S. Federal Reserve Chairman Ben Bernanke said on the 13th [of July] that the U.S. economy may need additional stimulus and the Fed may take action to continue its expansionary monetary policy. He mentioned three possibilities, one of which is to continue to purchase U.S. Treasury bonds. Market analysts believe the U.S. is headed for another round of quantitative easing.

Policymakers should, however, think more thoroughly before implementing monetary policies to stimulate the economy. The impact of such policies domestically and internationally can be a double-edged sword. And policymakers should think twice before adding liquidity to the market.

While Bernanke worries about the slow growth of the U.S. economy, U.S. banks worry that a Fed stimulus could lead to high inflation. U.S. bankers, Republicans and economists indicate that the Fed may lay the foundation for future inflation. Richard W. Fisher, CEO of the Federal Reserve Bank of Dallas, said on the 13th that he opposes another round of quantitative easing because the U.S. has enough liquidity and increasing the money supply does not help to stimulate the economy.

If the U.S. continues to print more money, this can cause liquidity overflow outside the U.S., particularly in emerging markets. Such liquidity will flood oil, crop and capital markets and cause price levels to rise.

From an international trade perspective, U.S. quantitative easing may devalue the U.S. dollar, which is beneficial for U.S. exports but puts tremendous pressure on exports from emerging markets and developing countries. After the Fed’s second round of quantitative easing, some countries undertook monetary interventions to prevent appreciation of their currency. They believed the instability in global financial markets was an outcome of U.S. monetary policy.

In the first quarter of this year, the growth rate of the U.S. economy was 1.9 percent. Many estimate that growth will stagnate in the second quarter. The unemployment rate, on the other hand, remains high. Critics believe that the Fed’s quantitative easing didn’t give a significant boost to the economy. In this case, would the continued reliance on increasing the money supply to stimulate the economy achieve Bernanke’s expectations?

Digging deeper, the U.S., as the issuer of the world’s primary reserve currency, should be more responsible in its monetary policy. In an age of economic interdependence and reliance, the U.S. cannot stand by itself and hope that the world’s economy can function without problems and controversies caused by the impact of U.S. monetary policy.