WASHINGTON – The Federal Reserve’s plan to buy more Treasury bonds has incited critics at home to complain of possible runaway inflation and financial turmoil.

It turns out many foreigners are angry, too, suspecting that the Fed’s $600 billion program is a scheme to give U.S. exporters an unfair edge — one that endangers the global economy.

Is it? Or is the Fed’s plan a credible way to help end an unemployment crisis and revitalize the economy?

In either case, few dispute that Fed Chairman Ben Bernanke is taking a gamble. Whether or not his plan succeeds in aiding the U.S. economy, it risks triggering a trade war and encouraging dangerous speculation in financial markets.

Fallout from the move also took a toll on this week’s summit of world leaders in Seoul, where President Obama had to use precious negotiating time defending the Fed’s plan.

Many economists say the Fed didn’t have much choice — not with U.S. unemployment stalled at 9.6 percent, short-term interest rates already near zero and Congress refusing to spend more to jolt the economy.

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“They’ve run out of bullets,” says Uri Dadush, director of the international economics program at the Carnegie Endowment for International Peace.

So the Fed announced plans to print enough money to buy an average of $75 billion in Treasury bonds each month for eight months. And it left the door open for more. The bond-purchase program is intended to energize the economy by forcing down long-term interest rates. Those lower rates might encourage some consumers and businesses to borrow and spend more.

Yet the Fed’s move threatens to inflame global tensions. That’s because of what happens when it prints more dollars to lower interest rates: More dollars flooding the financial system will cause the dollar’s value to fall. That will make U.S. products cheaper around the world. It will also make foreign goods costlier in the United States. Americans will be less likely to buy foreign products.

Economies like Germany and China, which have ridden a wave of exports out of the recession, complain that the Fed’s main goal is to lower the dollar’s value to give U.S. exporters an unfair price advantage. They call the move hypocritical because Washington has long complained that Beijing keeps its currency artificially low to boost exports.

Carnegie’s Dadush says that countries must solve problems in their own economies, rather than point fingers at each other’s. But he adds that U.S. lawmakers should pass a short-term spending plan to jolt the economy instead of leaning on a Fed program that could rattle world markets.

Dadush says China should let the yuan rise, but fears other countries would then be tempted to game their own currencies.

“I’ve been watching trade for 35, 40 years,” Dadush says. “I’m more worried about a protectionist resurgence than I’ve been in my lifetime.”

 


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