Opinion

Fed's QE2, a dangerous and unnecessary step: futures pioneer

(Xinhua)
Updated: 2010-11-08 16:33

CHICAGO - Leo Melamed, the founder of financial futures, has labeled the US Federal Reserves' second round of quantitative easing not only dangerous but unnecessary.

The Federal Reserve announced Wednesday it would buy another $600 billion worth of US Treasury securities to revive the sputtering US economy.

"The US Federal Reserve is taking a very dangerous and unnecessary step by undertaking a second round of quantitative easing policy," Melamed told Xinhua reporter in an exclusive interview in Chicago on Friday.

"We have certain opinions as market participants. I think the Fed is taking a very dangerous step, because it's not clear that the QE2 is necessary, and it's also not clear whether it can achieve the purpose Fed intends," said Melamed, currently chairman emeritus of CME Group and CEO of global consulting enterprise Melamed & Associates, Inc.

"We already had a good deal of quantitative easing in the US, and so far it hasn't done any restructuring of the market. In terms of strength of the economy, our economy has not rebounded, so why would it be necessary to do it again, when the first round isn't helping. We should give it more time before we do anything else," he said.

Melamed warned it was a very dangerous move the Fed was undertaking. The danger was that it might not work to rejuvenate the economy but would create a falling dollar, which was not helpful for the economy and eventually would create an inflationary environment in the United States.

As for the rest of the world, Melamed indicated it would create a dynamic where every nation tried to lower the value of its currency so it could compete with the US dollar.

"If every nation competes to depreciate their currency, it's not a good thing," Melamed said.

"A currency war is not the right word to describe the current situation. War is an intentional act, I don't think the US is intending to create a war climate, I think it's just a logical result, not an intentional war," he said.

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Melamed admitted that the QE2 was very bullish on commodities, creating a surge in the price of commodities due to the influx of money.

"But the danger is that there are no underlying reasons for the rise of the prices, it doesn't really change the supply and demand equations, the prices could suddenly break, and it will create a very dangerous climate," Melamed said.

As an independent voter, Melamed was generally very pleased with the mid-term election results and has confidence that newly elected officials will change the direction of the economy and solve the high-unemployment through tax and spending cuts.

"If we reduce spending and taxation, that will encourage the business community to invest more and create more jobs, and that's the best way to reduce the unemployment rate," said Melamed, "I don't believe the Federal government should be printing money, they should be creating an environment for jobs by inviting investment and cutting taxes."