The U.S. Federal Reserve’s latest round of quantitative easing is not going to bring down unemployment nor put more money into the consumer’s hand, according to Stephen Roach, senior fellow at Yale University.
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Stephen Roach, senior executive with Morgan Stanley
Roach, the former non-executive chairman of Morgan Stanley Asia, told CNBC on Friday that it was going to be “exceedingly difficult” for the new policy measures to bring the jobless rate down.
“I hobnob with all these macro theorists at Yale, they don’t see any evidence of a linkage between liquidity injections in the mortgage-backed securities industry and the labor market distress in the U.S.,” Roach told CNBC Asia’s “Squawk Box”.
The Fed’s plan to buy $40 billion of mortgage-backed securitiesevery month indefinitely is aimed at reviving jobs by stimulating the housing market. The central bank also said it was unlikely to raise interest rates from their current near-zero level until at least mid-2015.
The Minneapolis Fed President Narayana Kocherlakota added this week that the central bank should vow to keep rates near zero until the jobless rate falls below 5.5 percent.
To this, Roach said, “It’s a great target, we want the Fed to hit that target, who wouldn’t want it? But is it going to work?”
The U.S. unemployment rate fell to 8.1 percentin August from 8.3 percent in July, but the rate has remained above 8 percent since early 2009 despite earlier rounds of monetary stimulus from the Fed and with interest rates staying close to zero.
Markets rallied earlier this week on hopes that the Fed's monetary stimulus will boost economic growth, bring down unemployment, and create wealth among U.S. consumers. Some experts, including Marc Faber, editor and publisher of the 'Gloom, Boom & Doom Report', have, however, raised doubts that the easing is going to have the desired effect.
Faber told CNBC last Friday that this latest round of easing would only provide a temporary boost to asset prices and not help the “man on the street.”
At the same time, U.S. households remain bogged down by high levels of debt. Data issued by the Fed on Thursday showed that U.S. household debt climbed $39.4 billion, the first gain in over a year, to $13 trillion in the second quarter.
According to Roach, the only way to help the U.S. consumers, whom he calls the “walking dead,” is by writing off their debt.
“We need debt forgiveness for consumers who have bet the ranch on collateral that is now under water,” Roach said, referring to households that owe the bank more than their home is worth.
“It’s very contentious. And they need financial security that can only come from higher level of personal savings. And banks need to take write-downs,” he added.
—By CNBC’s Jean Chua.