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Feud at The Fed: “Horrific Consequences” for Unlimited Easing

The Fed’s plan to purchase $40 billion in mortgage-backed securities and $45 billion in long-term US Treasuries every month for the foreseeable future is now creating internal feuds.

The Federal Reserve’s latest round of quantitative easing has no timetable to end or any measurable goal. Yesterday, the Dallas Fed President said this policy without limits would result in “horrific consequences”.

Reuters is reporting today on these “deep divisions” at the Federal Reserve:

Charles Evans, president of the Chicago Federal Reserve Bank and one of the Fed’s most outspoken doves, said interest rates should stay near zero until the jobless rate falls to at least 6.5 percent. Such a policy would carry ‘only minimal inflation risks,’ and could boost growth faster than otherwise, he said.

Evans, who rotates into a voting seat on the Fed’s policy-setting panel in January, also said the Fed should step up its program of quantitative easing in the new year to keep its overall level of asset purchases at $85 billion a month for most, if not all, of 2013.

But Dallas Fed President Richard Fisher, a self-identified inflation hawk, said the U.S. central bank could get into trouble if it does not set a limit on the amount of assets it is willing to buy.

‘You cannot expand without limits without horrific consequences,’ he told reporters on the sidelines of the conference organized by the Levy Economics Institute in Berlin. ‘There is no infinity in monetary policy, we know that from the German experience.’

No one at the privately-owned US central bank has been able to explain how spending $85 billion per month ($1.02 trillion for 2013) on these purchases will reduce unemployment and maintain dollar price stability, the only tasks the Fed is charged with.

In fact, they don’t even pretend to be achieving these duties anymore. Both Evans and Fisher agreed that fixing unemployment is more important than controlling high inflation. Therefore, they’re willing to trade one for the other.

“I am not worried about inflation right now, I am worried about an underemployed workforce in America,” said Fisher indicating that he is willing to go along to get along despite his “horrific consequences” remark.

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