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How would monetary policy change if its aim is to promote financial stability? That is the question posed by a
new IMF working paper
. The authors say that rate cuts should be dramatic but should also be transitory — central banks should "tighten as soon as bank risk appetite heats up." As
notes, the paper adds to a lively debate about whether the Fed is
fueling asset bubbles
with its ultra accommodative policy.
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I have long believed that current Fed policy, in addition to serving the mission of managing inflation and employment, had the effect of being a "back door" bailout of Wall Street and the banking industry.
Current policy has the Fed buying $85 billion a month of securities from the banking industry and crediting their accounts, effectively loaning these firms funds for a near zero cost. These institutions are not using these funds to lend into our economy, but instead, use them to trade for their own accounts, making large sums in profits for themselves.
Can the Fed exit without these funds entering into our economy without leading us into high inflation? No one knows, as purchases and money creation on this scale has never been done before.
Our advice to clients and investors, BE PREPARED. Understand the risks and prepare to hedge against bad outcomes.
Apr 4, 2013. 04:21 AM
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