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This month marks the seventh anniversary of the Federal Reserve's first round of quantitative easing — the program that more than quadrupled the central bank's balance sheet, sparking a debate over the limits of monetary policy.
The Fed is now taking baby steps toward ending its crisis-era policy, laying the groundwork for a widely expected interest rate hike in a few weeks. That hasn't allayed the concerns of a former Fed official who helped implement QE.
Andrew Huszar is a Fed veteran who served as the "quarterback" for the world's largest stimulus program by managing the purchase of more than $1 trillion worth of mortgage-backed bonds — only to renounce his support for the entire effort in a 2013 public apology. In a recent interview with CNBC, Huszar insisted the excess liquidity created by the Fed has done more to enrich Wall Street than the average citizen.
By swelling its balance sheet to a record $4.5 trillion through three separate forays into bond buying, the central bank has "lost some perspective," Huszar told CNBC. "It's expanded its footprint so largely that's it's seeing the world too much through Wall Street's eyes," he said, speaking of the "unintended consequences" of QE that are coming due.
As blue chip and technology shares have soared — major benchmarks hit record highs earlier this year — key indicators such as consumer spending, job creation and wages have remained stagnant.
"Consumer spending over the last seven years has been the most anemic on record," having grown by less than 2 percent, Huszar said. "Unless you think the top 20 percent of Americans can fuel the entire economy, you have a situation where we're not going to have enough consumption to fuel GDP."
After three rounds of QE, the central bank has begun to question its own results.
In a 2013 white paper that was widely discussed at the time, researchers at the San Francisco Fed suggested that "the effects of a program like QE2 on GDP growth are smaller and more uncertain than a conventional policy move" like simply cutting rates. More recently, the head of the St. Louis Fed said there was no evidence that asset purchases provided ballast to growth.
To be certain, the Fed's bond buying has its fair share of defenders. At an Intelligence Squared U.S. event last week that debated whether central banks were capable of "printing prosperity," Capital Economics' executive chairman, Roger Bootle, argued that under dire circumstances, monetary authorities can and should step in as lenders of last resort.
"Let's be clear about this: Printing money is not the answer" to every economic ill, he said. "There are limits to what it can achieve, and it's not for all seasons."
However, "every so often, [the] financial and monetary system breaks down, sometimes in spectacular fashion," he added. "When that happens, all these wonderful real things like hard work, capital investment and technological progress" get "swept away in the tsunami of monetary collapse."
Yet other economists say that the divergence between fundamentals and asset prices underscores how swaths of the economy have defied the Fed's monetary stimulus five years after the recession ended. In spite of QE, research from the Minneapolis Fed that compares the relative strength of post-war recoveries show that current output is the slowest on record.
The Fed's excess liquidity is creating a situation where investors "are piling into assets … and that rise in asset prices may be creating a minimal trickle-down effect," Huszar told CNBC. "However, in my mind, it's pushed up financial asset prices pretty dramatically. A lot of that is the Fed pushing the market's paper value way above its true value."
The stage is being set "for some sort of correction, but I don't know when that will happen," he added. "We have massive amount of liquidity circulating as a result of the Fed's actions … and the current cycle might go on for a while."
Meanwhile, the Fed is increasing uncertainty because of its efforts to curb market volatility, which some observers have interpreted as an unspoken "third mandate" alongside unemployment and growth.
"Every time the market swoons the Fed is on some level trying to keep prices up," Huszar told CNBC. When that loses its efficacy, "that's when we're going to see the rubber hit the road."
Under that scenario, the U.S. could easily see its economy replicate Japan's "lost decade" of low growth, high imbalances and falling prices, from which it has yet to fully recover.
"Going forward, I think we're going to have periods of stability and then moments of acute volatility and they are going to become increasingly large, and the confidence the Fed has cultivated may eventually disappear," Huszar said. I don't know how big the market correction will be, but we're at a place where the market's fundamentals are disconnected from its technicals."