Bloomberg News

Romney-Ryan See Fed QE as Inflation Risk Amid Low Prices

August 14, 2012

Representative Paul Ryan, writing less than a month after the Federal Reserve announced a new round of bond-buying in 2010, said the move to purchase another $600 billion in securities risked stoking inflation and pushing down the dollar.

Since that prediction by Ryan, who has been chosen by presumptive Republican presidential nominee Mitt Romney to be his running mate, the dollar has risen against major currencies and inflation has stayed below the Fed’s goal of 2 percent.

While off target so far, the warning by Ryan parallels Romney’s criticism of the unprecedented Fed program known as quantitative easing to spur growth by purchasing a total of $2.3 trillion in securities. Romney and Ryan oppose the policy even as Chairman Ben S. Bernanke says he stands ready to provide more accommodation if necessary to achieve a steady decline in the 8.3 percent U.S. unemployment rate.

A Fed led by a Romney-Ryan administration appointee “would be less inclined to frequently fiddle with the knobs” of economic policy, said Stephen Stanley, chief economist for Pierpont Securities LLC in Stamford, Connecticut. “There would be a strong sense in the markets that a different strategy is probably forthcoming,” with higher odds the Fed would raise interest rates and a lower probability it would buy more bonds.

By selecting Ryan on Aug. 11, Romney enlisted the architect of Republican congressional plans to curb spending and overhaul U.S. entitlements, especially Medicare. Ryan, from Wisconsin, is chairman of the House Budget Committee.

Spending Cuts

Romney, 65, has endorsed Ryan’s budget and talked generally about a fiscal plan that shares much in common with it, including slashing federal spending by $500 billion by 2016. The former Massachusetts governor hasn’t yet provided specifics about what government spending he would cut.

Ryan, 42, and Stanford University Economics Professor John Taylor wrote in a November 30, 2010, opinion piece in Investor’s Business Daily that the Fed’s record stimulus, including expansion of its balance sheet, amounts to an attempt to “bail out” U.S. fiscal policy.

The Fed combated the financial crisis by keeping the main interest rate close to zero beginning in December 2008 and through two rounds of quantitative easing. In the first round starting in 2008, the central bank bought $1.25 trillion of mortgage-backed securities, $175 billion of federal agency debt and $300 billion of Treasuries. In the second round, announced in November 2010, the Fed bought $600 billion of Treasuries.

‘Predictable Manner’

“If the money created to finance these asset purchases is not withdrawn in an expedient and predictable manner, the Fed risks higher inflation and a depreciated currency,” Ryan and Taylor wrote.

“While consistent with the ‘sugar-high economics’ practiced in Washington of late, quantitative easing marks a further departure from the foundations for prosperity and another step toward an increasingly politicized central bank,” they wrote.

From the date of the editorial until yesterday, the Dollar Index, which tracks the U.S. currency against those of six major U.S. trading partners, advanced 1.53 percent.

The core personal consumption expenditures index, which excludes volatile food and energy costs, hasn’t exceeded 2 percent since November 2008. It rose 1.8 percent in June from a year earlier, and has averaged 1.5 percent since November 2010. So-called core inflation will end the year at 1.8 percent, according to the median estimate in a Bloomberg News survey.

Taylor, a Treasury undersecretary under Republican President George W. Bush, didn’t return an e-mail and a phone call to his office seeking comment.

Romney Statements

Lanhee Chen, policy director for Romney, declined to comment on Ryan’s statements on the central bank.

Fed governors are appointed to staggered 14-year terms while the chairman and two vice-chairmen are appointed to four- year terms. If he were to be elected president, Romney would be able to appoint the Fed’s chairman, vice chairman of the board and governors as their terms expire. The Fed also has a slot for a vice-chairman of supervision, created by the Dodd-Frank financial reform law, that has never been filled.

Ryan has also missed the mark with his forecast a year ago that the U.S. government’s loss of its AAA credit rating by Standard & Poor’s would increase the cost of mortgages. Bernanke has aimed through the bond purchases to reduce borrowing costs.

The yield on the 10-year U.S. Treasury note fell to a record low of 1.39 percent on July 24 from 2.56 percent on August 5, 2011, when S&P downgraded U.S. debt. The yield was 1.66 percent in New York trading yesterday.

Mortgage Rates

Mortgage rates have fallen lower since the downgrade as well. The average 30-year mortgage rate was 4.39 percent the week of the downgrade. It fell as low as 3.49 percent on July 26 before rising to 3.59 percent last week.

While Democrats may “jump all over” Ryan’s forecasts during the campaign, the risks he identified for inflation and the dollar remain, said Robert Brusca, president of Fact & Opinion Economics.

“I wouldn’t judge him so harshly even though he was wrong,” said Brusca, who is based in New York and doesn’t belong to a political party. “The concerns that he raised when he said these things are still in play.”

Found Fault

Romney has also found fault with Bernanke’s effort to spur growth. In a Sept. 8 debate with other Republican presidential contenders, he said he would “be looking for somebody new” as Fed chairman after Bernanke’s four-year term expires on Jan. 31, 2014.

Romney said on June 17 the second round of quantitative easing was ineffective while potentially causing inflation and undermining the dollar. A third round would pose the same risks, he said.

“QE2, as it’s called, which was a monetary stimulus, did not have the desired effect,” the former Massachusetts governor said in an interview on CBS’s “Face the Nation.” “It was not extraordinarily harmful, but it does put in question the future value of the dollar, and will, obviously, encourage some inflation.”

“A QE3 would do the same thing,” Romney said. “But the potential threat down the road in inflation is something which we have to be aware of, and the last QE2, the last monetary stimulus, did not put Americans back to work, did not raise our home values, did not bring jobs back to this country or encourage small businesses to open their doors.”

To contact the reporters on this story: Jeff Kearns in Washington at; Joshua Zumbrun in Washington at

To contact the editor responsible for this story: Chris Wellisz at

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