While many say it is out of bullets, author and Wharton Professor Jeremy Siegel says the Federal Reserve still has ammunition left to combat the sluggish economy.
Siegel writes on Yahoo! Finance that the Fed’s plan to buy Treasuries with the principal payments on its mortgage-backed securities “was just a baby step. Much stronger measures can and should be taken to combat the economic slowdown.”
Siegel criticizes Federal Reserve Chairman Ben Bernanke for not inspiring enough confidence in the Fed’s ability to further boost the economy during a recent Congressional appearance. “The historical evidence is that Bernanke has every right to believe the Fed can still be very effective,” Siegel says.
Siegel says the Fed should lower the interest rate it pays on bank reserves to zero, and says the Fed should engage in more quantitative easing.
“Quantitative easing is a viable policy,” he says, “and, when combined with a reduction in the interest rates on reserves and the continued support of the asset-based securities markets, the Fed can deliver a potent combination of policies to stimulate the economy.”
Siegel also says those who say Japan’s experiment with quantitative easing was a failure last decade are wrong. He says that move did in fact help in Japan, and adds that the U.S. economy is “far better suited” to benefit from quantitative easing than Japan’s. “Adding reserves will induce banks and investors to buy longer-dated and higher-yielding assets, reduce long-term rates, and spur more lending by the banks,” he says.