Britannia Radio

Roubini: Fed Will Eat Own Words, Resume Easing

Friday, 23 Apr 2010 09:07 AM

By: Dan Weil

The Federal Reserve is likely to resume quantitative easing after reversing it some in recent months, says star economist Nouriel Roubini.

The Fed expanded its balance sheet by leaps and bounds to fight the financial meltdown starting in 2008, buying securities and making loans on very easy terms.

That move is known as quantitative easing

Now the Fed has begun to reverse the stimulus, ending its $1.25 trillion of mortgage security purchases on March 31, for example.

“The federal funds rate is going to stay at zero until at least the first quarter if not the second quarter of next year,” Roubini told Bloomberg. 

That’s because given the anemic economic recovery, deflation remains a bigger risk than inflation, he says.

“Chances are they (Fed officials) are going to resume quantitative easing, because if they’re going to have a back-up in mortgage rates or in 10-year Treasury yields, the last thing the Fed can afford in an election year is have a crowding out of the housing recovery.”

The 10-year Treasury yield recently hit 4 percent for the first time since June.

“The Fed is (likely) going to eat its own words and resume quantitative easing directly or indirectly,” Roubini said. 

To be sure, Fed officials are still talking about reversing stimulus. 

"Some directors favored taking a further step at this time toward (reducing) the discount rate structure that existed before the crisis," according to minutes from the Fed’s mid-March meeting.