It’s time for the Fed to take away the punch bowl. As Martin Feldstein writes in today’s Wall Street Journal:
The Federal Reserve should begin now to end its program of long-term asset purchases. It should not wait for the improved labor market that it predicts will come later this year, an improvement that is unlikely to occur. Instead, the Fed should emphasize that the pace of quantitative easing must adjust to the likely effectiveness of the program itself, and to the costs and risks of continuing to buy large quantities of bonds.
Although the economy is weak, experience shows that further bond-buying will have little effect on economic growth and employment. Meanwhile, low interest rates are generating excessive risk-taking by banks and other financial investors. These risks could have serious adverse effects on bank capital and the value of pension funds. In Fed Chairman Ben Bernanke’s terms, the efficacy of quantitative easing is low and the costs and risks are substantial.