Markets Allocate Credit Better Than the Fed

Letter to WSJ.

"In “Congress Needs to Rein In a Too-Powerful Federal Reserve” (op-ed, Sept. 2), Judy Shelton is correct that the Fed’s bond-buying program, commonly known as quantitative easing, is distorting the allocation of credit while increasing income inequality. She might also have noted that QE broke an over 60-year policy of not interfering with the allocation of credit.

Based on the well-recognized fact that markets allocate credit better than government agencies, the Fed had a tradition of conducting open market operations using very short-term Treasurys. It did this to minimize the effect of its operations on interest rates and the allocation of credit.

When QE was being discussed at the Fed’s December 2008 meeting, no fewer than five Reserve Bank presidents raised concerns that the program would distort the allocation of credit. These concerns were noted and ignored. With the federal-funds rate at zero and weak employment and output growth, the Fed didn’t want to be seen doing nothing. It didn’t know what else to do.

That QE has been largely ineffective is obvious: From the third quarter of 2009 to the fourth quarter of 2019 economic growth was historically low, only 2.3%. Since Q3 2009, the S&P 500 index has more than tripled and interest rates on certificates of deposit and other safe investments available to retirees and others on fixed incomes have been historically low.

Dan Thornton

Des Peres, Mo.

Mr. Thornton is a retired VP of the Federal Reserve Bank of St. Louis."