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Fiscal deal needed to ease Fed's burden of saving economy single-handed: economist

English.news.cn   2013-12-10 01:22:06            

WASHINGTON, Dec. 9 (Xinhua) -- A more responsible fiscal plan which combines short-term stimulus with long-term debt reduction would free the U.S. central bank from its current disproportionate burden of boosting the economy with unclear effectiveness, said an U.S. economist on Monday.

"The Federal Reserve is pursuing a very risky monetary policy," said Martin Feldstein, a professor of economics at Harvard, in an article published by the New York Times.

The Fed's strategy has been to stimulate the economy by driving down long-term interest rates through amassing long-term bonds and pledging to keep short-term interest rates near zero, but "the magnitude of the effect has been too small to raise economic growth to a healthy rate," said Feldstein, who served as chairman of the Council of Economic Advisers under former U.S. President Ronald Reagan.

"While doing little to stimulate the economy, the Fed's policy of low long-term interest rates has caused individuals and institutions to take excessive risks that could destabilize the economy just as it did before the 2007-2009 recession," he added.

As job growth has strengthened in recent months, the Fed is expected to scale back its bond buying in the coming months, but Feldstein hold that the Fed is "unwittingly" encouraging private investors and institutions to continue to take risks by promising to keep long-term interest rates "abnormally low."

He said although the House-Senate conference committee on the budget may be close in on a compromise which would limit the across-the-board budget cuts known as the sequester and prevent another government shutdown, the modest deal would not produce the kind of long-term fiscal policy needed to achieve strong income and employment growth.

"To get the economy back on track, President Obama should propose, and Congress should enact, a five-year fiscal package that would move the growth of gross domestic product (GDP) to above 3 percent a year and focus on direct government spending on infrastructure," he said.

Feldstein said combining a major short-term fiscal stimulus with long-term deficit reductions that would cause the ratio of debt to GDP to begin declining by the end of this decade would allow the Fed to stop trying to shoulder - with increasing futility - the burden of saving the economy all by itself.

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