Policy Documents

The Fed Needs to Change Course

David Malpass –
September 6, 2013

In this article published in the CATO Journal, David Malpass writes about the Federal Reserve’s monetary policy, examines its economic impact, and discusses possible exits. Federal Reserve policy is on the wrong course: it is harming economic growth, hurting savers, damaging markets, setting dangerous prece- dents and misallocating capital away from job-creating parts of the economy. The Fed’s September 2012 policy change, in which it announced a third round of quantitative easing (QE3), was a major increase in the aggressiveness of monetary policy and, in my view, another drag on economic growth.

The best exit strategy would be for the government to adopt growth-oriented tax, spending, and regulatory policies in parallel with a growth-oriented Fed resolve to provide sound money and downsize its role in the economy. The combination would encourage invest- ment and hiring in the U.S. private sector. The damage from the Fed’s balance sheet holdings and its imposition of zero percent inter- est rates would diminish, allowing the development of sound money, market-based allocation of capital, and forward-looking private sector confidence—an expectation that the Fed would interfere less with interest rates and debt markets.