San Francisco Fed President Ponders Permanent Easing

After the financial crisis of 2008, the Federal Reserve began the controversial practice of Quantitative Easing .  The Fed used bonds to rapidly increase the money supply.  This was justified because the economy was supposedly in a time of unprecedented distress and poised for collapse.

Both Reuters and Bloomberg are now reporting that San Francisco Fed President Mary Daly is talking about making Quantitative Easing a permanent program.  Although she spoke with the usual timidity of a Federal Reserve official, Daly admitted that more frequent use of Easing was being discussed.

There are two main problems that can be caused by this intervention in the economy.  The first is that flooding the markets with money can cause horrible inflation.  Since this inflation is related to easy money rather than economic growth, it can become the dreaded stagflation.  In stagflation, prices rise but wages remain stagnant and unemployment can increase.  The other problem is that inflation lowers personal savings rates and investment by individuals.  When money is becoming less valuable by the day people spend their money before the prices go up.  When banks have easy money they can lend at very low interest rates and less stringent underwriting.  That pushes private lenders out of the market.  The low interest environment is especially hard on the retired which rely on CDs and bonds for income as well as pension funds which rely on a low risk, stable lending portfolio for sure and steady returns.

We can hope that those running The Fed have more sense than to make Quantitative Easing a mainstay of intervention.  However , recent decades have shown that decisions are often made more to benefit the member banks and the stock market than the people of the United States.  The market rallied moments after Daly's statements were released.  We will have to wait and see.