Why Fed bond-buying plan is raising trade tensions

WASHINGTON - The Federal Reserve's plan to buy Treasury bonds has incited critics at home to complain of inevitable high inflation and financial turmoil.

It turns out many foreigners are pretty angry, too. They say the Fed's $600 billion buying 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 a desperate jobs crisis and revitalize a still-tepid economy?

Either way, few dispute that Fed Chairman Ben S. Bernanke and other officials on the Federal Open Market Committee are taking a gamble. Whether or not their plan succeeds in aiding the U.S. economy, it risks triggering a trade war and encouraging dangerous speculation in world financial markets.

Already, the finger-pointing threatens to wreck this week's summit of world leaders in Seoul, South Korea, where the Fed's plan has set off vociferous debate.

Many economists say the Fed did not 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.

"They've run out of bullets," said Uri Dadush, director of the international economics program at the Carnegie Endowment for International Peace.

The bond-purchase program is intended to energize the economy by forcing down long-term interest rates, which might encourage some consumers and businesses to borrow and spend more.

That is not likely, its critics say. For one thing, mortgage rates already have dipped to record lows without reviving the housing market, reducing high unemployment, or stimulating much growth. Would people and businesses that cannot or will not borrow now start borrowing if interest rates on loans dip a bit more?

A bigger hope is that lower rates will lift stock prices. That's because, as Bernanke has suggested, investors will shift money out of low-yielding bonds and into stocks. Higher stock prices make people feel wealthier - and more willing to spend.

Business leaders, too, become more confident when their personal wealth increases and when their company's stock goes up. They are more likely to hire and expand, strengthening the economy.

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 has already been happening since Bernanke hinted in a Wyoming speech in August that the Fed might begin a purchase program.

A cheaper dollar makes U.S. products cheaper around the world. It also makes foreign goods costlier in the United States, so Americans will be less likely to buy foreign products.

Economies such as 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, the yuan, artificially low to boost Chinese exports.

Critics also warn that rates kept too low for too long could inflate new bubbles in the prices of commodities, stocks, and other assets. That is what happened before with technology stocks and home prices. And commodity prices - oil, cotton, gold, soybeans, and many others - already are up sharply since Bernanke's comments in August.

Developing countries such as Thailand and Indonesia fear that falling yields on Treasury securities will send money flooding their way in search of higher returns. Such emerging markets could be left vulnerable to a crash if investors later decide to pull out and move their money elsewhere.

"For the rest of the world, the benefits are tenuous, but the risks are hitting them right in the face," Eswar Prasad, professor of trade policy at Cornell University, said of the Fed's bond-purchase program.