Fed Policies a 'Horror Show' for U.S. Economy: Grantham
By Abby Schultz, Special to CNBC.com
Fund manager Jeremy Grantham, long a Federal Reserve critic, issued a blistering attack on Fed policies Wednesday, likening its strategy of low interest rates and monetary easing to a Halloween horror movie that is dangerous and destabilizing to the economy.
"In almost every respect, adhering to a policy of low rates, employing quantitative easing, deliberately stimulating asset prices, ignoring the consequences of bubbles breaking, and displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment," Grantham, chief investment officer of GMO, an investment management firm in Boston said.
Grantham's quarterly note to clients came with a mock horror movie image titled, "Night of the Living Fed: Something Unbelievably Terrifying." (
Click here to read the note.)
More from CNBC
Best Cities to Relocate to in America
Luxury Holiday Gifts 2010
Democrats Retain Edge in Campaign Spending
The comments by Grantham, a well-respected voice in the financial community, contributed to the selloff in stocks on Wednesday. Stocks extended their losses as concerns grew that the Fed's next round of quantitative easing may actually be less agressive than expected.The central bank, which has already bought about $1.7 trillion worth of Treasury and mortgage-related debt, is expected to launch a second round of asset purchases next week of anywhere from $500 billion to $2 trillion. But the Wall Street Journal reported Wednesday that the central bank may start buying only a few hundred billion dollars over several months. Grantham, meanwhile, said the Fed's policies under both Alan Greenspan and Ben Bernanke have led to runaway commodity prices, asset bubbles, a falling dollar and are likely to have no long-term benefit for the economy. The investment manager said if he were a "benevolent dictator," he would "strip the Fed of its obligation to worry about the economy and ask it to limit its meddling to attempting to manage inflation." The problem with quantitative easing -- the Fed policy of stimulating the economy through actions such as purchases of long-term debt -- is it has historically led to the creation of more debt in the economy, as well as higher asset prices, and has not led to higher rates of GDP growth. Instead, lower rates "encourage speculation in markets and produce higher-priced and therefore less rewarding investments, which tilt markets toward the speculative end," Grantham wrote. "Sustained higher prices mislead consumers and budgets alike." Grantham's attacks were not centered just on the current administration.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV