Fed's Bullard admits that the Federal Reserve is very inexperienced in balance sheet policy

St. Louis Fed Chief James Bullard expressed skepticism on the recent QE2 policy.  The biggest and most damning statement he made was that the Federal Reserve doesn't have a lot of experience in balance sheet policy. 

Considering that none of it has worked, it doesn't surprise me.  I always knew that they were winging it.  Someone there came up with a bright idea, Let's increase the balance sheet and decrease the interest rate while increasing inflation! 

It reminds me of Fannie Mae before their implosion.  They hired a bunch of PhDs so they thought they were the experts.  They would get interviews on CNBC.  As it turns out, the genius blowhards had too much confidence in their own abilities.

Their current policy of QE2 just makes the interest rate more negative and of course that is exactly what they want.  What they and I don't understand completely is the unintended consequences.  Negative real rates are bad and create malinvestment.  Via IMN:

Bullard also addressed the Federal Reserve's latest decision to stimulate the U.S economy with a second round of quantitative easing, and during his presentation said he favored leaving the door open to possibly scale back that stimulus in the event the economy begins to heal.

But, Bullard added that the Fed is inexperienced with central bank balance sheet policy, like the recent decision to purchase $600 billion in U.S Treasurys and said because of that inexperience any decision to curtail or expand the recent stimulus package will likely remain a Committee decision.

"At this point I think it's going to be a committee judgement, I just don't think we can be more precise than that because we don't have that much experience with these balance sheet policies," Bullard said.


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