Fed move draws new attack

By Charles Riley, staff reporter


NEW YORK (CNNMoney.com) -- The Federal Reserve's plan to purchase $600 billion in bonds, in an attempt to stimulate the economy, is coming under fire from a group of prominent conservative economists and political strategists.

"The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment," the group says in an open letter posted Monday on the Wall Street Journal's website and scheduled to be published this week in the New York Times and Wall Street Journal.

The Fed announced earlier this month it would purchase another $600 billion of long-term Treasuries, a move known as quantitative easing, or "QE2," since it is the second round of such purchases. The first round of purchases took place on Friday.

The group of 23 does not include any elected officials, but politics is clearly in play. Among the group's members are former Congressional Budget Office director and McCain campaign adviser Douglas Holtz-Eakin, Weekly Standard editor William Kristol and former Bush administration adviser Dan Senor.

The open letter represents the most coordinated domestic anti-QE2 effort to date, and comes in the wake of considerable opposition from international leaders.

Shortly after the Fed's initial announcement, the German finance minister called the policy "clueless," while South African and Chinese officials also voiced concern.

Opponents fear that the Fed's move could reignite inflation pressures, cause a new global asset bubble or spark a so-called "currency war" in which nations devalue their own currencies to keep their own exports competitive.

QE2 will "distort financial markets" according to the authors.

"We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy," the letter reads.

In response to the letter, a Fed spokeswoman said the organization has a dual mandate from Congress to "help promote both increased employment and price stability."

"In light of persistently weak job creation and declining inflation, the Federal Open Market Committee's recent actions reflect those mandates ... In particular, the Fed has made all necessary preparations and is confident that it has the tools to unwind these policies at the appropriate time," she said. To top of page

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