According to Martin Feldstein, a professor of economics at Harvard, the US economic growth may not top 2% this year and the a third round of quantitative easing by the Fed would have little effect on the economy. He goes on to see the QE3 is not the solution and the economy would not get much help from it.
By Bob Willis and Sara Eisen
Jan 27, 2012 8:57 AM MT
U.S. economic growth may not top 2 percent this year and a third round of quantitative easing by the Federal Reserve would have little effect, said Martin Feldstein, a professor of economics at Harvard University.
“We’re going to have a hard time reaching 2 percent this coming year,” he said in an interview on Bloomberg Television’s “InsideTrack” with Sara Eisen in New York. The economy is still in a “danger zone,” Feldstein said, even as the recession risk “is less now than it was.”
The economy grew at a less-than-forecast 2.8 percent pace in the fourth quarter, with consumer spending at 2 percent, the government reported today. Inventory accumulation accounted for 1.9 percentage points of the total growth rate, setting the stage for fewer orders to factories in the first half of the year.
Feldstein, a member of the committee that dates recessions, said any move by the Fed to conduct a third round of quantitative easing, known as QE3, is “not the solution.” The economy wouldn’t “get much help from more monetary stimulus,” he said.
Federal Reserve policy makers this week pledged to keep their key lending rate near zero until “at least” late 2014, moving the target further back more than a year. Fed Chairman Ben S. Bernanke hinted the central bank would consider conducting QE3 through large-scale asset purchases, saying it was prepared for further “accommodation.”
Feldstein, speaking before the GDP report was released, said last year’s growth in household spending was largely due to consumers drawing down their savings, which he said they won’t be able to maintain this year.
“The thing that made that increase in consumer spending possible was people cut their savings rate” he said. “It’s hard to believe it’s going to happen again” at the same pace.
For the full year 2011, the economy expanded 1.7 percent and consumer spending grew 2.2 percent, according to Commerce Department data. The personal savings rate fell to 3.5 percent in November from 5.8 percent in June 2010, the department said.
“The question is, what, if anything, is going to sustain real GDP growth in 2012,” said Feldstein.
Feldstein said the second round of quantitative easing provided a temporary boost to stock prices, consumer spending and economic growth in 2010. Then, as the effect faded, the economy “fell flat on its face in the first quarter of 2011,” he said, when growth was 0.4 percent.
Feldstein said it was a “joke” to term as “voluntary” any agreement with the Greek government over lowering its debt principal and payments to avoid triggering credit default swaps.
“To call that voluntary just so they can avoid triggering the credit default swaps is really dishonest,” he said. “People bought credit default swaps thinking that was a real market, it was real insurance.”
Officials, including former European Central Bank President Jean-Claude Trichet, have insisted that a swaps trigger was unacceptable because traders would be encouraged to bet against indebted nations and worsen the crisis.
Feldstein is a former president of the National Bureau of Economic Research and a member of the NBER committee that declared the recession ended in June 2009. He formerly served as chief economic adviser to President Ronald Reagan.
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