Fed exit fraught with dangers, monetary experts say

The Federal Reserve has not been clear enough about how it intends to unwind its unprecedented monetary easing campaign, and some of the tools it expects to use may not work, monetary experts will tell Congress on Thursday.

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John Taylor, a Stanford University economist and author of a key central banking rule of thumb, will testify before the U.S. House of Representatives Financial Services Committee that the Fed’s unorthodox approach has not only threatened its independence but also made policy making more difficult.

“By taking these extraordinary measures, the Fed has risked losing its independence over monetary policy,” said Taylor, arguing that such steps veered too far into the arena of fiscal policy.

“Unwinding them involves considerable risks,” said Taylor, who was a Treasury official during the Bush administration, in prepared testimony made available on the House committee’s website on Wednesday. [Read the full article]

Donald Kohn, vice chairman of the Federal Reserve, said on Wednesday the country United States is experiencing only a modest economic rebound despite an apparent surge in fourth-quarter growth figures.

U.S. gross domestic product grew 5.9 percent in the fourth quarter, but the spike was driven in large part by a rebuilding of inventories that economists do not believe will be sustained at the same clip.

“We’re looking at a gradual recovery,” Kohn said in response to questions at an academic conference. “The results of the fourth quarter were kind of distorted.”

A modest U.S. economic recovery still warrants the Federal Reserve’s ultra-low interest rate policy, but the central bank stands ready to remove stimulus once the expansion looks solid, Chairman Ben Bernanke said on Thursday. [Read the full article]

U.S. Federal Reserve Vice Chairman Donald Kohn said on Wednesday that top policy makers had been “a little complacent” about complex financial instruments that contributed to the global financial crisis.

The banking meltdown, which resulted in emergency measures by the U.S. central bank totaling well over $1 trillion, helped push the world economy into its first recession since World War Two.

“The reality is that we didn’t understand the economy as well as we thought we did,” Kohn said in a speech at Davidson College in Davidson, North Carolina.

“Serious deficiencies with these securitizations — the associated derivative instruments, and the structures that evolved to hold securitized debt — were at the heart of the financial crisis.”

Kohn, who announced earlier this month that he will step down from the No. 2 position at the Fed after a 40-year career at the U.S. [Read the full article]

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