When the Fed buys long-term government debt from the private market, it shifts interest rate risk from bondholders to taxpayers," Minneapolis Fed President Narayana Kocherlakota warned last week. There are fears that rushing to buy additional assets will do little to spur hiring or spending in an economy already awash in excess cash, one in which nervous consumers are saving more and paying down debt. "Asset purchases in our current economic environment can do little if anything to speed up the return to full employment," Philadelphia Fed President Charles Plosser said in a recent speech. "Because I see little gain at this point, and some costs, I would prefer not to engage in further asset purchases at this time." Many economists echo Plosser's doubts about the Fed being able to jumpstart the economy with more money."I think the impact [of additional purchase] will be minimal," said Bernard Baumohl, executive director of the Economic Outlook Group.Even if asset purchases lower interest rates, Baumhohl said, banks are still reluctant to lend and both businesses and consumers are still too nervous to take on more debt. So lowering rates feeds the risk of inflation down the road without solving the problem today. "We are following policies that unless changed will eventually lead to lots of inflation down the road," said Warren Buffettat Fortune's Most Powerful Women Summit. "We have started down a path you don't want to go down."
The government has two more years to show improvement to the economy or the House will not be the only thing that the Democrats will have to worry about in 2012.
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C. Cohn
The Cohn-Reilly Report
