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Keep on Pumping

Tighter fiscal policy may persuade the Fed to keep printing money.

Growing concerns voiced recently by some Federal Reserve Board members about the costs of quantitative easing have prompted many investors to brace for early tightening by the central bank. But the Fed’s doves appear far from ready to cede to their hard-line colleagues. In a speech last month, vice chairman Janet Yellen underlined some of the reasons the U.S. economic recovery is proceeding at less than half the pace of the average postwar rebound. Discretionary fiscal policy, which typically boosts the economy by about a half point a year during recoveries, has been a brake on growth for the past two years as governments at the federal, state and local levels have trimmed budgets. Fiscal policy “will continue to be a headwind for the recovery,” she predicted, and Washington looked set to oblige, with sequestration cuts set to kick in on March 1. With housing and weak incomes also acting as drags, it all adds up to “a painfully slow recovery for America’s workers,” as Yellen put it.

The QE debate will continue to rage, but the argument of this dove suggests that the Fed’s money tap will remain open.

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