Fed Needs to Pump Trillions More Into Economy: Analyst
The Federal Reserve needs to pump at least $6 trillion to $7 trillion more into the U.S. economy to have any meaningful impact on sluggish growth, former Bush economic adviser Marc Sumerlin told CNBC.
Sumerlin, co-founder of The Lindsey Group, a Washington DC-based economic advisory group, also said that the U.S. would fall back into a recession if the Bush tax cuts aren't extended beyond this year.
The Fed has hinted for weeks that it is ready to buy up more debt in the credit markets to help spur the economy, which is still recovering from the financial crisis of 2008. The U.S. central bank has already spent over $1 trillion since early 2009 to keep credit markets liquid in what has become known as quantitative easing, or QE. (For a fuller explanation, click here.)
Although the Fed hasn't indicated how much more money it might pump into the economy—which has been labeled QE-2—Sumerlin's recommendation goes well beyond what most other economists expect or even recommend.
"U.S. households have $70 trillion in assets," Sumerlin explained during a live interview. "And the Fed essentially needs to buy enough Treasurys and mortgages that you can get a bid on all those other assets. And when you have leakage in the international system it takes a pretty big amount to be successful. To me, it starts to get interesting at six to seven trillion dollars."
Sumerlin's comments, which came around midday, helped push stocks lower.
“To get someone who was part of the former economic council saying the Fed will need to step up big and do $6 trillion in (asset purchases), was a bit of a shock and created a bit of nervousness,” Marc Pado, market strategist at Cantor Fitzgerald, told CNBC.com.
Few economists expect the Fed to commit that much new money to helping the economy, and many think any further quantitative easing wouldn't have that much impact anyway.
Pimco co-CEO Mohamed El-Erian, for instance, told CNBC earlier Thursday that further monetary easing by the Fed and other central banks probably won't work.
"The risk is that this may be ineffective again," he said. "In fact, the big story of the last year and a half is every time we have had a policy action, outcomes have fallen short of expectations."
Raoul Pal, global macro analyst for the Global Macro Investor, who appeared with Sumerlin on CNBC, also questioned the wisdom of further easing.
"There is no evidence that it's ever worked in the past, so there is no real evidence that it will work now," Pal said. "So I think it's a high risk thing for them to try and do. I also don't believe you can get the money in the system. Even if it's $6 trillion, I don't think it's going to get in the system because there is no velocity of money. So all you end up doing is buying the Treasurys off the banks who will keep the money at the Fed."
As for extending the Bush tax cuts—which Congress has put off voting on until after the November elections—Sumerlin said "we will have a recession" if they are allowed to expire.
"Because we're growing too slowly," he said. "If you look at the quarters when the tax cuts went in, there was very substantial growth. People forget that the third quarter of 2003, we grew at 7 percent when the tax cuts—the full marginal rates—took effect. Running that in reverse causes the opposite to happen."