HFS Subcommittee Discusses Fed ‘s QE program on the International Financial System
At
January 9th’s House Financial Services Subcommittee on Monetary Policy and Trade
hearing, lawmakers discussed what effects the Federal Reserve’s Quantitative
Easing (QE) program has had on foreign economies and the international
financial system as a whole.
Witness
Testimony
Ben
Steil, Senior Fellow and Director of International Economics, Council on
Foreign Relations, stated
that QE has “encouraged investors to shift resources into riskier assets.
Though wholly unintended by the Fed, however, this shift has encompassed
securities issued in emerging market countries.” Dr. Steil pointed particularly
to India, Indonesia, Turkey, and Brazil, as emerging markets that have felt
“substantial impacts” from QE3 and tapering.
Allan
Meltzer, Professor of Political Economy, Tepper School of Business, Carnegie
Mellon University, stated
that he would like to see focus return to long term stability, and also
mentioned that “international stability requires collective agreement” among
central banks. Meltzer went on to propose a new plan that would seek to achieve
domestic price stability and increased exchange rate stability that would
consist of six points, including: 1) that the central banks of the U.S.,
Europe, Japan, and China agree to maintain domestic inflation between 0 and 2
percent a year; 2) that any other country that chooses to import low inflation
and maintain a fixed exchange rate can peg at its own choice to one or a basket
of the major currencies. The country that chooses this policy is responsible
for maintaining its exchange rate; 3) that major countries benefit by gaining
exchange rate stability with all countries that peg to one or more of their
currencies; 4) that it be a voluntary system; 5) that the system would
introduce discipline where the markets would do the enforcement by forcing
countries to adjust through currency devaluation and increase expected
inflation if a country lands large budget deficits; and 6) and that countries
could suspend operation of the system like they did under the gold standard.
Meltzer next went on to say the amount of problems from QE is small, because
“the reserves that the Fed has produced are almost entirely idle reserves. More
than 95 percent of QE2 and QE3 have the first round of expansion and then are
idle and held by banks.”
“With
$2.5 trillion sitting idle on banks’ balance sheets and $2 trillion sitting
idle on corporate balance sheets, what in the name of goodness can the Federal
Reserve do that the banks and the corporations not do by themselves?”
He
finished his remarks by proposing to close the World Bank, and placing
prudential restrictions on International Monetary Fund lending.
Desmond
Lachman, Resident Fellow, American Enterprise Institute, stated
how U.S. monetary policy can affect international economies especially in
emerging markets. Specifically turning to emerging markets, Lachman said he is
concerned that emerging markets will become more vulnerable once the capital
inflow stops. He went on to stress “the Federal Reserve will need to be very
mindful of the international spillovers of its policies” as it unwinds its QE
program.
Lastly,
Arvind Subramanian, Senior Fellow, Peterson Institute for International
Economics and Senior Fellow, Center for Global Development, was
the only witness to suggest that QE has been primarily beneficial to emerging
markets. Subramanian reflected that QE1 was seen as a success as it stopped the
world financial system from collapsing. He also noted that “being exposed to
U.S. policies is part of the deal of financial globalization that emerging
markets and others, as consenting adults, have voluntarily signed on to.”
Question
and Answer
The
bulk of questions focused on QE’s impact internationally, specifically on
emerging markets. Other questions focused on the impact foreign markets have on
the U.S as a result of QE; what the U.S. can do to grow its domestic economy
while at the same time promoting international stability; and what role the
U.S. should play internationally moving forward.
Campbell
began with a broad question, simply asking panelists to explain the “greatest
negative impact of QE on international economics.” Lachman split it into short
term and long term impacts, conceding that while the short term might be
beneficial, the long term impact results in reduced market discipline and
“allows these countries to establish imbalances so when the music stops, when
the process is unwound, those countries are extremely vulnerable to the slowing
of the capital.”
In
contrast, Subramanian felt that if the countries on the receiving end of QE
handle it correctly, the long term impact will also be beneficial.
Meltzer
and Lachman were highly critical of future investment in the IMF, and critical
of the amounts it is lending to high-risk countries in the Eurozone including
Greece, Portugal and Ireland.
“So
I don’t think that one can take much comfort from the fact that in the past the
IMF has always been repaid. The IMF had never in the past loaned on the scale
to countries with as bad of credit ratings as it has done in the past five
years,” Lachman said.
Subramanian,
on the other hand, was more optimistic that investment in the IMF by the U.S.
is good policy precisely because it is a safe investment.
Rep.
Robert Pittenger (R-NC) asked for the panel’s views on the future of the
tapering program under newly confirmed Fed Chairman Janet Yellen. Steil pointed
to the Federal Open Market Committee (FOMC) minutes that show a “general
consensus to move forward with the tapering process and that [Yellen] is not
about to make any sort of sudden change in that process. As long as
circumstances remain roughly what they are today, we can expect the process to
continue.”
Meltzer
advised that the Fed should immediately end its QE program and create a plan to
get rid of excess reserves.
Lachman
agreed with Steil, but disagreed with Meltzer’s proposal to stop so abruptly,
warning that since the Fed is in “uncharted waters… we really don’t know what
the impact of the unwinding is going to be.”
For
more information on this hearing and to view the webcast, please click here.
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At
January 9th’s House Financial Services Subcommittee on Monetary Policy and Trade
hearing, lawmakers discussed what effects the Federal Reserve’s Quantitative
Easing (QE) program has had on foreign economies and the international
financial system as a whole.
Witness
Testimony
Ben
Steil, Senior Fellow and Director of International Economics, Council on
Foreign Relations, stated
that QE has “encouraged investors to shift resources into riskier assets.
Though wholly unintended by the Fed, however, this shift has encompassed
securities issued in emerging market countries.” Dr. Steil pointed particularly
to India, Indonesia, Turkey, and Brazil, as emerging markets that have felt
“substantial impacts” from QE3 and tapering.
Allan
Meltzer, Professor of Political Economy, Tepper School of Business, Carnegie
Mellon University, stated
that he would like to see focus return to long term stability, and also
mentioned that “international stability requires collective agreement” among
central banks. Meltzer went on to propose a new plan that would seek to achieve
domestic price stability and increased exchange rate stability that would
consist of six points, including: 1) that the central banks of the U.S.,
Europe, Japan, and China agree to maintain domestic inflation between 0 and 2
percent a year; 2) that any other country that chooses to import low inflation
and maintain a fixed exchange rate can peg at its own choice to one or a basket
of the major currencies. The country that chooses this policy is responsible
for maintaining its exchange rate; 3) that major countries benefit by gaining
exchange rate stability with all countries that peg to one or more of their
currencies; 4) that it be a voluntary system; 5) that the system would
introduce discipline where the markets would do the enforcement by forcing
countries to adjust through currency devaluation and increase expected
inflation if a country lands large budget deficits; and 6) and that countries
could suspend operation of the system like they did under the gold standard.
Meltzer next went on to say the amount of problems from QE is small, because
“the reserves that the Fed has produced are almost entirely idle reserves. More
than 95 percent of QE2 and QE3 have the first round of expansion and then are
idle and held by banks.”
“With
$2.5 trillion sitting idle on banks’ balance sheets and $2 trillion sitting
idle on corporate balance sheets, what in the name of goodness can the Federal
Reserve do that the banks and the corporations not do by themselves?”
He
finished his remarks by proposing to close the World Bank, and placing
prudential restrictions on International Monetary Fund lending.
Desmond
Lachman, Resident Fellow, American Enterprise Institute, stated
how U.S. monetary policy can affect international economies especially in
emerging markets. Specifically turning to emerging markets, Lachman said he is
concerned that emerging markets will become more vulnerable once the capital
inflow stops. He went on to stress “the Federal Reserve will need to be very
mindful of the international spillovers of its policies” as it unwinds its QE
program.
Lastly,
Arvind Subramanian, Senior Fellow, Peterson Institute for International
Economics and Senior Fellow, Center for Global Development, was
the only witness to suggest that QE has been primarily beneficial to emerging
markets. Subramanian reflected that QE1 was seen as a success as it stopped the
world financial system from collapsing. He also noted that “being exposed to
U.S. policies is part of the deal of financial globalization that emerging
markets and others, as consenting adults, have voluntarily signed on to.”
Question
and Answer
The
bulk of questions focused on QE’s impact internationally, specifically on
emerging markets. Other questions focused on the impact foreign markets have on
the U.S as a result of QE; what the U.S. can do to grow its domestic economy
while at the same time promoting international stability; and what role the
U.S. should play internationally moving forward.
Campbell
began with a broad question, simply asking panelists to explain the “greatest
negative impact of QE on international economics.” Lachman split it into short
term and long term impacts, conceding that while the short term might be
beneficial, the long term impact results in reduced market discipline and
“allows these countries to establish imbalances so when the music stops, when
the process is unwound, those countries are extremely vulnerable to the slowing
of the capital.”
In
contrast, Subramanian felt that if the countries on the receiving end of QE
handle it correctly, the long term impact will also be beneficial.
Meltzer
and Lachman were highly critical of future investment in the IMF, and critical
of the amounts it is lending to high-risk countries in the Eurozone including
Greece, Portugal and Ireland.
“So
I don’t think that one can take much comfort from the fact that in the past the
IMF has always been repaid. The IMF had never in the past loaned on the scale
to countries with as bad of credit ratings as it has done in the past five
years,” Lachman said.
Subramanian,
on the other hand, was more optimistic that investment in the IMF by the U.S.
is good policy precisely because it is a safe investment.
Rep.
Robert Pittenger (R-NC) asked for the panel’s views on the future of the
tapering program under newly confirmed Fed Chairman Janet Yellen. Steil pointed
to the Federal Open Market Committee (FOMC) minutes that show a “general
consensus to move forward with the tapering process and that [Yellen] is not
about to make any sort of sudden change in that process. As long as
circumstances remain roughly what they are today, we can expect the process to
continue.”
Meltzer
advised that the Fed should immediately end its QE program and create a plan to
get rid of excess reserves.
Lachman
agreed with Steil, but disagreed with Meltzer’s proposal to stop so abruptly,
warning that since the Fed is in “uncharted waters… we really don’t know what
the impact of the unwinding is going to be.”
For
more information on this hearing and to view the webcast, please click here.