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GOP vs. QE2: Republicans Warn Bernanke About Bubbles

I recently highlighted the rising concern that quantitative easing, the Federal Reserve program to stimulate the economy by buying billions of dollars of Treasury bonds, will create market bubbles without producing the hoped-for economic benefits. Four leading congressional Republicans have joined the chorus.

The four - House Republican leader John Boehner, House Republican Whip Eric Cantor, Senate Republican leader Mitch McConnell and Senate Republican Whip Jon Kyl - have sent a letter to Fed Chairman Ben Bernanke expressing "deep concerns" over the Treasury purchases, known as QE2. Among their main concerns, according to Bloomberg News, which saw the letter, the Republican leaders cite the potential for market bubbles:

"While intended to improve the short-term growth of the U.S. economy and help maintain a stable price level, such a measure introduces significant uncertainty regarding the future strength of the dollar. [The purchases could] result both in hard-to-control, long-term inflation and potentially generate artificial asset bubbles."
Based on stock market action since the letter was disclosed last Wednesday, Wall Street appears unruffled by it or by Republican proposals to compel the Fed to focus solely on price stability - controlling inflation - and not on maintaining healthy economic growth, as well, the other half of the so-called dual mandate authorized by Congress in the 1970s. Perhaps reflecting widespread complacency among investors, Troy Davig, an economist at Barclays Capital, sent a note to clients predicting a continuation of the status quo in Washington:

"We believe that this letter, like other recent criticism aimed at the Fed, is unlikely to deter the FOMC [policymaking panel] from its plan to purchase $600 billion of Treasuries by the end of [the second quarter], and it is likely to continue the program beyond that point if it judges that such purchases are needed. The FOMC argues that its purchases are aimed at meeting its dual mandate of full employment and price stability. Unless the mandate is changed by congressional legislation that is signed by the president, which we view as unlikely, the Fed is likely to continue to take the actions it believes are necessary to fulfill its mandate."
That may explain the complacency on Wall Street, and Davig is probably right that the Fed of tomorrow will be a lot like the Fed of today. But if the doubts about QE2 are justified, then Fed-as-usual won't do the markets or the economy much good in the long run.

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