Former US Federal Reserve chairman Paul Volcker says the US central bank’s plan to buy hundreds of billions of dollars in government bonds probably won’t do much to boost the economic recovery.
The Fed announced on Wednesday that it would purchase US$600 billion in Treasurys, aiming to lower long-term interest rates in an effort to spur spending and ultimately lower the US unemployment rate, currently at 9.6 percent. The move comes on the heels of previous purchases of US$1.7 trillion in mortgage and Treasury bonds.
Volcker told a business audience in Seoul that the Fed’s bond plan is obviously an attempt to spur the US economy, but “is not the kind of action that’s likely to change the general picture that I’ve described as slow and labored recovery over a period of time.”
PHOTO: AFP
The Fed’s move has caused worries in South Korea and other emerging markets in Asia. Those governments fear that lower interest rates in the US will further push investors to seek higher returns overseas and that this tide of money will drive up their currencies and destabilize their markets.
Volcker served as Fed chief from 1979 until 1987 under former US presidents Jimmy Carter and Ronald Reagan and is currently chairman of US President Barack Obama’s Economic Recovery -Advisory Board. He also warned that the US won’t find its way out of the economic doldrums through over-stimulation.
“The thought that you can create a prosperous economy by inflating is an illusion, in my judgment,” he told reporters after his speech. “And we should never forget that. I thought we’d learned that lesson and I hope we continue to learn that lesson.”
The Fed faces a dilemma in balancing the aim of boosting the economy now while avoiding fears of a future jump in inflation due to the monetary stimulus, said Volcker, who as central bank chairman hiked interest rates aggressively to tame inflation.
“The influence of this kind of action on longer term interest rates, in particular, is ambiguous because the immediate impact of buying bonds ought to be to drive bond prices up and interest rates down,” he said.
“But if people get concerned about longer run inflationary impacts, the effects go in the other direction,” he said.
On Thursday, Templeton Asset Management Ltd’s Mark Mobius said the Fed’s bond purchase plan would further drive the rally for global stocks and push commodity prices “higher and higher.”
“We could have an optimistic scenario for quite some time,” Mobius, who oversees about US$34 billion, said in a telephone interview from Beijing. “Commodities are the big area for us. We are great believers in higher commodity prices and therefore are investing in commodity companies.”
The liquidity flooding the global economy from the Fed’s quantitative easing will extend record gains for commodities and dollar depreciation cannot be avoided, said Mobius, 74, who is also the chairman of Templeton’s emerging markets group.
Emerging markets may face inflationary pressure from the capital inflows spurred by the Fed’s measures, he said.
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