|Taylor: urging caution
Leading economists are sounding the alarm over the global
fallout of monetary policy in the west, amid fears that
ultra-loose policies in the US and Europe are fuelling
excessive risk taking and a repeat of the practices that led to
the financial crisis.
Stanford economist John Taylor has warned that central bank
policy was encouraging the same search for yield and
excessive risk taking that contributed to the global
He also cautioned against the adoption of unconventional
monetary policies as the US Federal Reserve mulls a
resumption of quantitative easing, including purchases of
government bonds, in a bid to shore up a flagging US
It [further quantitative easing] wouldnt be a
good idea. [The Fed] has such a huge balance sheet as it
is, Taylor, author of the Taylor Rule on interest rate
policy, told Emerging Markets.
William White, former chief economist at the Bank for
International Settlements (BIS), said monetary policy in
advanced economies is creating financial imbalances and
headwinds that now threaten sustainable growth and
focus solely on the shorter term effects on domestic
The Fed has pumped $2 trillion into the economy since
September 2008 through quantitative easing. Fears of a
double-dip recession or a deflationary spiral that could lead
to a prolonged loss in economic output have galvanized Western
central banks to unleash yet-more liquidity.
Senior Fed officials have signalled more asset purchases
could be announced at a policy meeting in the first week of
November. The UK government bond market has rallied this week
on hopes the Bank of England will announce a new round of
quantitative easing today.
Phil Suttle, chief economist at the Institute of
International Finance, said central banks in the West are
prisoner of financial markets, fearing unexpected policy action
will ignite market turmoil.
Randall Kroszner, a former board member of the Federal
Reserve, said the US central bank should purchase long-term US
government bonds. The fear of disinflation that
will lower consumption, increase the nominal value of debt,
decrease wages, increase foreclosures and places pressures on
banks will galvanize them to action, he said.
While the Feds near-zero interest rate policy is
broadly appropriate, further credit easing dangerously
increases banks dependency on the central bank, said
Taylor. Meanwhile, acquisition of public and private debt is
compromising the independence of monetary policy, and could
I would not increase interests rates now in US, Europe
and Japan that would be very damaging for the economic
recovery, said Jose Vinals, director of the monetary and
capital markets department at the IMF.
Although Vinals said further credit easing will have
marginal returns as interest rates are already low,
Central banks should be ready to rescale quantitative or
credit easing if the situation requires but bearing in mind
that the room for maneuver is now more limited.