The Fed vs. the ECB

With the slow but steady improvement of the U.S. economy, including employment, real estate and consumption, has the time come for the Federal Reserve to put an end to its systematic injection of funds — $85 billion a month — to help bolster the economy?

More and more opinions are coming up in this debate in the U.S. — including those within the Fed, judging from the latest debates of its highest authority, the Federal Open Market Committee.

However, as the outcome of its usual meeting held on Tuesday and Wednesday, May 21 and 22, Fed Chairman Ben Bernanke indicated that this policy would be maintained. Bearing the barbaric name of “quantitative easing,” it was put into action several months after Barack Obama’s ascendance to the presidency.

Noting the insufficiency of minimum reductions to its prime rates — again lowered to between 0 and 0.25 percent since December 2008, just after Wall Street’s collapse — since Nov. 2009, the Fed has launched a grand plan of pumping funds [into the economy] in the hope of reviving consumption.

Between its huge purchases of “bad debt” and “twists” — the sale of treasury bonds reaching maturity to repurchase long-term bonds — the Fed will have injected $3 trillion into the U.S. economy in three successive plans.

The Best Outlook in Three to Four Months

Wednesday Bernanke deemed it “premature” to abandon this policy, which “would also carry a substantial risk of slowing or ending the economic recovery,” a risk he reckons is more important than inflation, which his opponents are stressing.

His principal reason is that even while things improve, the job market remains “weak.” The Fed has fixed a lower unemployment rate at 6.5 percent to change its direction; however, it still remains at 7.5 percent.

In other words, if it envisages slowing down the monthly funds being injected if growth improves, it will not dismiss the possibility of an increase if its current sluggish rhythm (2.5 percent) retracts.

The general outlook remains worrisome, according to Bernanke’s estimations, given international uncertainties — especially in Europe, he noted — as well as the recent “sequestered” budget’s consequences, such as uniform cuts in public spending and tax hikes taking place — in particular payroll taxes paid by employers and employees — which together could cost the U.S. 1.5 percentage points of growth.

In short, the Fed believes that it is too early to cease printing money. “Three or four months from now I think you’re going to have a much better sense of, is the economy healthy enough,” forecast William Dudley, president of the New York Fed, the regional bank that supervises Wall Street.

The Risk of a Long Stagnation: ‘Like the Japanese’

The European reference coming from Bernanke on Wednesday was not accidental. The day before, on a visit to Goethe University in Frankfurt, James Bullard, president of the Federal Reserve Bank of St. Louis, had exhorted Europeans to also put in place a policy of large injections similar to the Fed’s.

If Europe does not produce the means for such a revival, it risks a long stagnation like the Japanese, he estimated. “The lesson of Japan is that once you get stuck, it’s very hard to get out.”

The American banker had disclaimed the idea that the legal structure of the European Central Bank prevents it from following this plan. If the ECB wanted, it could buy bonds issued by the 17 member states of the euro zone in proportion to their size, he assured.

Bullard claimed to be speaking from personal opinion, but he expressed a point of view strongly and long-held by Washington, according to which Europe is insufficiently aggressive [when] faced with economic crisis.

During a meeting in Poland in September 2011, an acerbic controversy pitted U.S. Secretary of the Treasury Timothy Geithner against the German Finance Minister Wolfgang Schauble on this subject.

“You just have to choose to do it,” Geithner struck at Schauble; without mincing words, the latter responded with mind your own business, since “Americans have significantly worse fundamental data than the euro zone.”

Times have changed since this point of view was popular.