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sean silcoff

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An old joke is that if you ask five economists a question you'll get six different answers. But ask the 12 members of the U.S. Federal Reserve's Open Market Committee (FOMC) the question "Should the U.S. continue to snap up $85-billion worth of Treasury and mortgage-backed securities per month and keep interest rates at rock bottom levels?" and you get 11 yeas and just one nay.

Why the lone dissenting vote on Wednesday from Esther George, president of the Federal Reserve Bank of Kansas City – her third such vote since joining the FOMC in January? Her answer should send a chill: the longer this period of loose money continues, the more disruptive it will be for the economy when it ends.

Ms. George's reasons for dissent are mentioned only briefly in the FOMC's release Wednesday: that she "was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations." But we can learn more from two speeches she gave earlier this year in which she lays out her concerns. The following quotes come from the speeches.

This has been a slow recovery, not unlike periods following past financial crises, marked by high unemployment and sluggish GDP growth. Ms. George stands behind the "forceful action" taken by the Fed and other central banks during the Great Recession to slash interest rates to near zero. But she's troubled by the central bank's subsequent four years of what she calls "overly accommodative" quantitative easing – a practice Fed Reserve chairman Ben Bernanke has stated will continue until the unemployment rate drops to 6.5 per cent.

The question is what happens when the Fed turns off the taps. "These purchases have their own set of risks and are not without cost," Ms. George said. "At their current level and pace of growth, I believe they almost certainly increase the risk of complicating the FOMC's exit strategy."

The consequences of "low-for-long" rates have weighed on savers, wreaked havoc with pension funds and financial institutions and driven investors to take riskier bets in pursuit of higher returns – a situation Ms. George argues "can create financial distortions" and lead to concentrated risks "in unexpected corners of the economy and financial system."

When the Fed stops buying and starts selling off all those securities, she warned, it "could be potentially disruptive to markets and market functioning, or cause an unwelcome rise in mortgage rates."

At the same time, her suggestions may be no panacea either. At the last FOMC meeting in March, she said the Fed's asset purchases should be wound down because they provided relatively small benefit. While that could head off even greater distortion – it could also prematurely doom any economic recovery.

Either way, it's difficult to see how the Fed eventually reverses monetary policy without causing a spike in long-term interest rates, inflation and/or unemployment –either by prematurely cutting off a recovery in process or causing violent spasms in an economy that becomes too acclimatized to the imbalances inherent in current monetary policy. Perhaps this just underlines the need for more fiscal, rather than monetary stimulus, and an easing of austerity policies. That's one issue where the debate is far more polarized.

Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff.

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