The Federal Reserve Bank’s former Chief Economist, David Stockton, warns of a "bumpy ride" ahead. He also criticizes his former employer.
Even with a better-performing economy, markets are in for a “bumpy ride”, cautions the Federal Reserve Bank’s former Chief Economist, David Stockton.
Stockton expects the Fed to begin tapering its monetary stimulus program (“QE2”) program either in September or December of this year. The Fed currently adds money into the economy by purchasing $85 billion in bonds every month.
Buying bonds also helped to reduce US interest rates near its lowest level in decades, though rates have inched up recently in anticipation of tapering. Stockton believes rates will increase further.
“I wouldn’t expect necessarily for it to be very sharp,” says Stockton. “If the Fed is good at its job of communicating, it advances intentions. But I would expect a bumpy ride here for the second half of the year.”
Stockton went on to criticize the Fed, where he served for three decades. He was Chief Economist and Director of Research and Statistics until 2011.
“I think most recently, it’s been a less-than-ideal performance by the Fed,” Stockton says. “I think the Fed needs to be clearer about its outlook for QE and, specifically, what kind of factors they will be looking at before they actually begin tapering.”
Though he says the Fed could reverse its policies at any time, Stockton believes a return to monetary expansion after tapering would be a lot harder for them to do so. “Once they begin the tapering, the bar for actually increasing the amount of purchases again would be pretty high.”
While Stockton does not believe a small interest rate increase would damage the economy, “I would be cautious at this point,” he recommends. “This is still an economy that has failed to achieve to take off a lot. And, we’re looking at a global economy that is looking increasingly soft, especially Asia and China.”