QE3 will not fix America’s problems, warns Paul Volcker

Saturday, September 22, 2012
By Paul Martin

Paul Volcker, the former Federal Reserve chairman credited with taming the inflationary threat of the 1970s, has warned that further quantitative easing will fail to repair economies in Europe and the US.

By Helia Ebrahimi
21 Sep 2012

Mr Volcker, addressing a conference at Gleneagles in Scotland, said the decision by the Fed to begin a third round of asset buying — nicknamed QE3 — amounted to the “most extreme easing of monetary policy” he could recall. Mr Volcker’s comments came as the World Trade Organisation intensified the economic gloom by slashing its global growth forecasts.

The organisation said it expected the world economy to grow 2.5pc this year, from a previous 3.7pc forecast, while growth in 2013 would slow from a previous estimate of 5.6pc to 4.5pc.
Although not explicitly directed at Fed chairman Ben Bernanke, Mr Volcker’s words will be seen as a veiled criticism of the limitations of the current strategy being employed by the Federal Reserve.

Mr Volcker, who has been a pivotal force in post-crisis regulation – as well as the architect behind the “Volcker Rule” that bares his name – addressed the Institute of Chartered Accountants in Scotland conference about how to revive the economic fortunes of the western world. “Monetary policy is about as easy as it can get,” said Mr Volcker, who built a reputation for quelling inflation through the unpopular decision of raising interest rates during his tenure at the US central bank. “Another round of QE is understandable – but it will fail to fix the problem. There is so much liquidity in the market that adding more is not going to change the economy.”

Last week, the Fed announced a programme of unlimited purchases of mortgage-backed securities in an effort to boost the economy and drive down unemployment. It also said it would hold rates near zero until mid-2015 .

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