Fed about to shoot the economy in the foot: Posen

According to Adam Posen, president of the Peterson Institute for International Economics, "the Federal Reserve is about to shoot the economy in the foot." Once the Fed starts winding down its bond-buying program, they will not stop and Posen thinks it is a big mistake given the current economic environment.

Greg Robb
July 10, 2013, 1:01 PM
Market Watch

The Federal Reserve is about to shoot the economy in the foot, said Adam Posen, president of the Peterson Institute for International Economics and a former member of the Bank of England’s monetary policy committee.

The Fed has committed to start to wind down its $85 billion-a-month bond-buying program in the next couple of meetings, Posen said.

And once they start, the Fed will not turn back, he added. Over the next six months, the central bank is likely to taper its purchases quite a bit.

“By the time we have a new [Fed] chairperson in Januar,. they will be almost done purchasing government securities,” Posen said during a conference call Wednesday with reporters organized by the Council on Foreign Relations.

Posen thinks this likely policy path is a mistake. He said tapering doesn’t make much sense given the current economic environment of very low inflation and slowly pace of decline in unemployment.

“[Fed Chairman Ben] Bernanke and the Fed are going to be sticking to their guns and thereby shooting the economy in the foot,” Posen said.

“We’ve gotten a commitment to tighten that is totally at odds with the forecast,” he added.

Posen and Brad DeLong, an economist at the University of California Berkeley, said it appeared that Bernanke had an eye on potential asset bubbles when he decided in June to lay of a timetable for the central bank to wind down its bond purchases.

Adding asset bubbles as a policy goal undermines understanding about Fed policy “and puts the markets back at sea,” DeLong said.

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