There seems to be some debate over whether Federal Reserve Board Chairman Ben Bernanke closed the door on additional quantitative easing or not during the Federal Reserve’s first ever press conference this week. The statement put out by the Fed prior to the press conference simply indicated that QE2 would be completed on schedule in June but added, “The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability.”
Bernanke defended QE2 saying “the second round of [security purchases] was affective.”
He said it helped equity markets, reduced spreads and volatility; adding that the economy responded to it with the same type of reaction as would be expected with an ordinary easing. He also said that he stated all along that it would not be a panacea.
This brought on the question, if it worked so well and since unemployment is still high why not continue it? His repsonse is the closest he came to a definitive statement saying, “the tradeoffs are getting less attractive,” and he specifically pointed to rising inflation and inflation expectations. That he acknowledged inflation is a victory for those frustrated with what they have viewed as the Fed's ongoing denial of inflation.
While it appears that there will not be a QE3, it also seems that an exit strategy is still far off. After all the purpose of quantitative easing according to Bernanke was the same as a typical easing (rate cut), which would be impossible because the Fed Funds rate was already at zero. And easing is usually followed by a period of stability before positive growth leads to tightening. The Fed said, “the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings,” and also that economic conditions, “ warrant exceptionally low levels for the federal funds rate for an extended period.”
That was translated in the press conference to several meetings. So an exit strategy is far off, and given that any rate below 3% could fairly be called exceptionally low, normal policy is years in the future.
One critic of QE 1 and 2 is Kessler Investment Advisors, who point out that it did not do its job of bringing down longer-term rates. They support a recommendation by David Rosenberg, Chief Economist of Gluskin Sheff, for another round of QE but with no additional purchases, just swap the majority of short-term instruments purchased in QE2 with longer-term debt.
With our debt problems it may make sense to spread out the purchases.
Next what questions should have been asked of Bernanke.