The recent downgrading of the U.S. debt will lead to another round of quantitative easing according to Ken Rogoff.
“They certainly should do something right away,” said Rogoff, a former International Monetary Fund chief economist who attended graduate school with Fed Chairman Ben S. Bernanke. It’s “hard to know” if Bernanke would immediately be able to gain the support of Federal Open Market Committee members, Rogoff said in an interview today on Bloomberg Television.
The FOMC meets today in Washington a day after the worst day for U.S. stocks since December 2008. Bernanke last month outlined policy options including additional asset purchases or strengthening the commitment to low interest rates after the first two rounds of so-called quantitative easing failed to keep the unemployment rate below 9 percent.
“Out-of-the-box policies are called for, especially much more aggressive monetary policy, however unpopular that may be,” said Rogoff, 58, a former Fed economist who like Bernanke earned a Ph.D. from the Massachusetts Institute of Technology. The Fed is “going to move more decisively,” Rogoff said.
At 2:15 today (Eastern Time) the Fed will release a press release like it always does after the FMOC meets. This will be the first opportunity to signal such a policy.
Rogoff recommended the Fed say in “very clear statements” that it’s trying to create “moderate inflation.” “In the classic classroom QE, it’s open-ended,” Rogoff said. “You say, ‘I’m trying to create inflation of, let’s say 2 or 3 percent, and I’m going to do whatever it takes.’”
This fits with what Rogoff has said in the past about the recession which he is calling the second great contraction which applies not just to output and unemployment, but also debt and credit.
I’m thinking that right now Bernanke is worried about the economy heading into another recession. The data have been indicating we have been heading in that direction for a few months now. All the volatility in the markets related to the U.S. and European debt problems has only added to uncertainty making the situation even more untenable.
