QE

The Fed’s dilemma: Continue cleaning up the last crisis, or prevent a new one? by Neil Irwin

Um, continue QE. Prevent bubble via means other than tight money. Money is already too tight.

On one side are the worriers: They include outright monetary hawks like Esther George of the Kansas City Fed and Richard Fisher of the Dallas Fed. They include a contingent at the Washington-based board of governors including governors Jeremy Stein and Jay Powell and former governor Elizabeth Duke, who have voted in favor of the QE3 program but with some reluctance.

This contingent looks around and sees all kinds of ugly side effects of the Fed's easy money policies. There is "reaching for yield" in which investors take on inappropriate risks in order to try to goose their returns. There is a shortage of Treasury bonds, used as ultra-safe collateral for a wide range of transactions. There are possible bubbles in everything from Iowa farmland to Indonesian government bonds.

The other contingent has included monetary doves like Charles Evans, Eric Rosengren, and Narayana Kocherlakota of the Chicago, Boston, and Minneapolis Fed banks. It has included, recently at least, James Bullard of St. Louis, who is particularly exercised about the Fed consistently undershooting its 2 percent inflation target. And it includes Janet Yellen, the president's nominee to succeed Ben Bernanke as chair.

This contingent looks around and sees an economy that still isn't gathering any real steam, held back by tightening fiscal policy. They see too-high unemployment as the paramount problem facing the economy, at a time when inflation is too low. Their job is to try to find ways to address this.

They may concede that the financial market disruptions the skeptics point to are worth watching, but at this juncture don't see enough evidence of bubbles or other problems to justify backing away from easing. If investors are plowing into riskier investments, well, that's a big part of the point of QE (it's called the portfolio balance channel: When the Fed takes treasury bonds off the market, investors have to plow into riskier assets, driving up the stock and bond markets).