After four years of quantitative easing programs, including QE3 just last fall, U.S. Federal Reserve officials have started voicing doubts about its effectiveness and concerns that it is distorting the markets.
And it's not just the Fed's hawks, such as Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser, speaking out against the bond-buying extravaganza.
Doves like Atlanta's Dennis Lockhart and moderates like Kansas City's Esther George have expressed concerns about QE3 as well.
"I do think the growth of the Fed's balance sheet could have longer-term consequences that are worrisome. While I've supported these policy decisions to date, I acknowledge legitimate concerns," Lockhart said in a speech in Atlanta on Monday.
According to the minutes of the December Federal Open Market Committee (FOMC) meeting, several members "thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet."
If in fact sentiment within the FOMC is turning against QE3, then the easy money spigot that has helped fuel the stock market and other investments could be switched off sooner than most expected, which could have a sharp impact on the markets.
QE3 Blamed for Overbought Assets
Fed members are worried that QE3 has distorted some markets.
"Prices of assets such as bonds, agricultural land, and high-yield and leveraged loans are at historically high levels," George said in a speech last week. "We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances."
Even QE3 champion Ben Bernanke, the Fed's chairman, has voiced reservations about QE3. He noted in a talk on Monday that the Federal Reserve needs to "pay very close attention to the costs and risks of its policies."
"There are extreme market distortions occurring due to the unusual monetary policy," Lawrence Goodman, president of the Center for Financial Stability and the former director of Quantitative Policy Analysis at the U.S. Treasury, told Bloomberg News. "The upshot is we are seeing increasing debate in FOMC meetings."
Such a sea change in attitude among Fed members is long overdue, according to Money Morning Global Investing Strategist Martin Hutchinson. Money Morning's stable of experts has warned of the dangers of QE since the program started back in 2008.
"They're running a very extreme monetary policy by any standards, and it's not surprising the costs are very high, much higher than a more conventional policy," Hutchinson said. "The most surprising thing is that we haven't had a Weimar-like takeoff in inflation. There is no reason, however, to suppose that Austrian economics is wrong, so at some point we can expect an almighty crash when all the malinvestment turns out to be worthless."
Did QE3 Do Any Good?
While the Fed's doves have just started to admit that QE3's inflation of asset prices is worrisome, the hawks have moved on to question whether the program is doing much to help the economy.
Calling the Fed's actions since 2008 "the most aggressive fiscal policy, and the most aggressive monetary policy this country has ever seen," Plosser said Tuesday that both failed to have the desired effect.
"Neither of those has had a result of some sort of magic panacea that has gotten the economy really growing very fast," Plosser said. "I'm not sure that the evidence supports the notion that somehow, if we just keep doing more of either one of those things, that's going to affect the outcomes very much."
But while the Fed coming to its collective senses over the folly of QE3 might seem to be a good thing, reversing its easy money policies will be painful for investors, and the Fed knows it.
"Securities purchases could have adverse effects on market functioning and financial stability," Lockhart said, warning that "the accumulating purchases of bonds could complicate" the Fed's "efforts to withdraw monetary stimulus when the appropriate time comes."
Investors will need to be prepared for the mass exodus from bonds that would result from FOMC tightening, which would start when QE3 ends. And the impact could be very sudden.
"There is no pulling back a little," Drew Matus, senior U.S. economist at UBS Securities LLC, told Bloomberg News. "It is always going to be hard to disengage in a very gradual manner."
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