Removing political gridlock in fiscal policy is far more important than what the Federal Reserve can do for the nation’s economic recovery, Glenn Hubbard, former economic advisor to George W. Bush and the dean of Columbia Business School, told “Nightly Business Report.”
In fact, he is doubtful that continuing the Fed’s stimulus plan will help the economy much, and said it still leaves great risk.
“Some of the risks have to do with misallocating capital, and capital markets are having such low levels of interest rates and … the expanded balance sheet for such a long period of time,” said Hubbard, who is also the author of “Balance: The Economics of Great Powers from Ancient Rome to Modern America.”
He is also concerned about what happens when the Fed ends its bond-buying program, citing the need for more clarity on the central bank’s exit policy.
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On Wednesday, Fed Chairman Ben Bernanke said the economy still needs help, and that the Fed’s current accommodative monetary policy is needed for the foreseeable future.
“Both sides of our mandate—both the employment side and the inflation side—are saying that we need to be more accommodative,” Bernanke said.
Minutes from the Fed’s June meeting were released earlier on Wednesday, and revealed that about half of the officials thought the central bank could end its stimulus program by the end of the year.
Hubbard said he agrees with Bernanke that the economic recovery is not vigorous, and noted that the Fed’s plan “certainly” brought down long-term interest rates.
However, he added, “The Fed`s own studies would suggest that incremental quantitative easing is unlikely to have a very large effect on the macro economy.”
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“What the economy really needs is an improvement in business confidence that could probably come more from better fiscal policy than monetary policy.”
That means if the U.S. wants to stay on top of the economic power list, those in power in Washington need to make changes to the budget rules and processes, he said.
As for the rest of the year, Hubbard said he doesn’t see a great strengthening of the economy.
“I see a continued muddling recovery, to be honest,” he said.
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