Obama defends Fed decision to print more dollars in face of growing criticism

Jon Ward Contributor
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President Obama on Monday defended the U.S. Federal Reserve’s recent move to buy $600 billion more in U.S. Treasuries, which has been criticized by top officials in foreign governments as a move to devalue the U.S. dollar.

“We’ve just gone through an extraordinary economic trauma, which has resulted in some extraordinary measures,” Obama said, speaking to reporters in New Delhi at a press conference with Indian Prime Minister Manhoman Singh.

“And the worst thing that could happen to the world economy, not ours — not just ours, but the entire world’s economy — is if we end up being stuck with no growth or very limited growth,” Obama said. “And I think that’s the Fed’s concern, and that’s my concern as well.”

The president was responding to a question about criticism from German Finance Minister Wolfgang Schäuble, who called the Fed’s move “currency slight of hand.”

“It doesn’t add up when the Americans accuse the Chinese of currency manipulation and then, with the help of their central bank’s printing presses, artificially lower the value of the dollar,” Schäuble said in an interview with Der Spiegel that appeared over the weekend.

And on Monday, the Chinese government added their voice to the growing chorus of criticism.

“As a major reserve currency issuer, for the United States to launch a second round of quantitative easing at this time, we feel that it did not recognize its responsibility to stabilize global markets and did not think about the impact of excessive liquidity on emerging markets,” said Chinese Finance Vice Minister Zhu Guangyao, according to Reuters.

Russia, Brazil and South Africa have all also condemned the Fed’s decision.

In addition, a top official under Federal Reserve Chairman Ben Bernanke, board of governors member Kevin Warsh, penned an op-ed Monday in the Wall Street Journal that was both a sign of major doubts about the Fed’s move and a significant criticism of Obama’s economic policies.

“Fiscal authorities should resist the temptation to increase government expenditures continually in order to compensate for shortfalls of private consumption and investment,” Warsh wrote. “The Federal Reserve is not a repair shop for broken fiscal, trade or regulatory policies.”

Warsh said that he considers the decision to buy $600 billion in U.S. Treasuries between now and mid-2011 — purchasing them with freshly minted U.S. dollars — “subject to regular review.”

“If the recent weakness in the dollar, run-up in commodity prices, and other forward-looking indicators are sustained and passed along into final prices, the Fed’s price stability objective might no longer be a compelling policy rationale,” Warsh wrote. “In such a case — even with the unemployment rate still high — we would have cause to consider the path of policy. This is truer still if inflation expectations increase materially.”

Schäuble has promised to make the Fed’s policy — known as “quantitative easing,” or QE2 since this is the second time the Fed has taken this action — a major point of contention at this week’s Group of 20 summit in Seoul.

Daniel M. Price, who served as President George W. Bush’s top adviser on international economic affairs, said some of the biggest concerns about QE2 come from “emerging markets who fear consequent distortions in currency and capital markets.”

“They have reacted by imposing ad hoc capital controls which can further distort investment flows and have an unfortunate history of outlasting the reason for their imposition,” Price told TheDC.

“Likewise, this move by the Fed has made it more difficult for the administration to galvanize countries to push China on currency appreciation when many view the Fed’s policy action as itself a contributor to currency misalignments and imbalances,” Price said.

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