Econintersect: One of the most hawkish Fed governors, Charles Prosser, President of the Federal Reserve Bank of Philadelphia, says there should be a dollar limit for QE (quantitative easing). Prosser has long been a critic of QE, aka LSAP (large scale asset purchase) programs.
Here is what Prosser said in an interview on CNBC Friday 01 November 2013 (a little over 2 minutes in length):
Also on Friday 01 November 2013, Richmond Fed president Jeffrey Lacker (another hawk) suggested in a meeting of the Global Interdependence Center in Philadelpia that it was time to redice QE3 (another word for taper) because “labor force conditions have improved pretty significantly“.
The deficit for 2013 has been most recently estimated to be about $640 billion. This means that the Fed is currently funding approximately 84% of the deficit with new excess banking reserves. The most recent CBO (Congressional Budget Office) estimate for the federal deficit for fiscal 2014 is $560 billion, only slightly larger than the annual rate of Fed Treasury security purchases of $540 billion.
What would be the possible consequences if the Fed continued the current rate of Treasury purchases and the deficit dropped below $540 billion? That could happen – after all, the CBO is notorious for making poor budget and deficit projections.
Let’s say that the Fed Continued QE3 for 12 months during which the budget deficit was $440 billion. That would amount to a reduction of debt held by the public by $100 billion and an increase in debt held by the government (through its proxy the Fed) of $540 billion.
Now that’s a scenario that deserves some examination.
Sources:
- Plosser: QE should be capped at a given amount (Steve Liesman, CNBC)
- The 2013 Long-Term Budget Outlook (CBO, September 2013)
- The Federal Government’s Budget: Basic Facts You Need To Know (Anthony Randazzo, reason.com)
- Reduce QE3 given labor market rebound, Fed’s Lacker says (Jonathan Spicer, Reuters, 01 November 2013)
- Updated Budget Projections: Fiscal Years 2013 to 2023 (CBO, last updated July 2013)
