Asset Boom vs Low Inflation

Since the Fed announced that it would start trimming it's bond buying program of $85 billion a month to $75 billion in the face of better economic outlook in December, the certain members of the FOMC have been open about their opinion on the Fed's recent QE program.

Being one of the strong critics of the program, Federal Reserve Bank of Dallas President Richard Fisher has been arguing against the whole bond buying program. In his opinion, the bond buying program does nothing much to the recovery, and the Fed should have cut back the amount of monthly bond purchase by $20 billion instead of $10 billion. Moreover, Fisher worries about increasing price of stocks and other assets. He isn't alone to warn about the bond buying programs push on asset price as stock prices are up 30% from a year ago. The worrisome result of the program is that "the boost to wealth and consumer confidence has accrued almost exclusively to the 52% of Americans who own stocks, based on a Gallup survey. It has not flowed through to jobs as the employment-to-population ratio has remained at 58.6% of the working-age population, within tenths of a percent of the recession low", according to RANDALL W. FORSYTH on Barron's. In other words, the bond buying program's main effect has been on the upward movement of the stock and asset prices but not much on the employment. The employment-to-population ratio has been lower than what it was at the "official" end of the recession, namely 59.4%, in June 2009, let alone before the recession ratio 62.7%. But we have to be careful here; to judge the QEs' effect on the economy, we should compare how the economy has been doing to how it would have done without the Fed's bond buying programs. Therefore, the judgement on the unemployment rate should be considered with a research on an "imaginary" economy without the QEs. However, the other point made in the above quote on the distribution of the Fed's high powered money and the beneficiaries of the FED's program, namely asset owners. The Fed's policy, therefore, could be a factor that is widening income inequality. Increasing income inequality should be tackled as soon as possible as it is growing as never before.

On the other hand, some members of FOMC have been big proponents of the Fed's bond buying program. Being one of them, Chicago Fed President Charles Evans has been taking strong stand on the continuation of the program to boost the recovery. He, among others, is worried by not-so-much inflation rate of 1.1% in the last year, which is well below the Fed's targeted level of 2%. To boost it to this targeted level, the Fed should pursue its near zero percent interest rate policy with its bond buying program, according to him. With low inflation, consumers and businesses have low incentive to borrow and spend their money. Therefore, the Fed is targeting high enough inflation to give confidence to consumers and businesses.

In other words, the Fed's policymakers have been divided between a policy against increasing asset prices and a policy against low inflation. Of course, it is not like "black vs white" argument. Fortunately, the monetary policymakers have been critical of each possible effect of the program.