Rising bond yields reveal Bernanke QE converges with growth

Smaller ‘Pop’

“The reactions to recent QE announcements suggest that it does still have effects, though not anything as big as the pop you got” from the first large-scale asset program, he said.

The Standard & Poor’s 500 Index, the benchmark for U.S. equities, was little changed at 1,507.91 at 10:00 a.m. in New York, swinging between gains and losses as contraction in the American economy prompted bets the Fed will be in no rush to end stimulus.

U.S. gross domestic product during the fourth quarter shrank at a 0.1% annual rate, the worst performance since the second quarter of 2009, when the world’s largest economy was still in the recession, Commerce Department data showed. The median forecast of 83 economists surveyed by Bloomberg called for a 1.1% gain in GDP.

Bernanke estimated that the Fed’s first round of securities purchases, announced in November 2008, reduced the yield on 10- year Treasuries by between 40 basis points and 110 basis points. The Fed bought a total of $1.7 trillion in mortgage bonds and Treasury securities. The second round, totaling $600 billion and announced in November 2010, cut yields an additional 15 basis points to 45 basis points, Bernanke said in a speech in August at a Fed conference in Jackson Hole, Wyoming.

Impact Varies

“So far, we think we are getting some effect, it is kind of early,” Bernanke said Jan. 14 at the University of Michigan’s Gerald R. Ford School of Public Policy in Ann Arbor, referring to the current round of bond buying. “We are going to continue to assess how effective” the program is “because it is possible that as you move through time and the situation changes that the impact of these tools could vary.”

Rising stock prices and inflation expectations suggest the Fed’s asset purchases are fueling the expansion, said Mark Gertler, a New York University economist and research collaborator with Bernanke. The Fed chairman said last month bond buying will continue until the job market shows “substantial” gains. Unemployment in December was 7.8%.

More Jobs

“Given the uncertainty about the economy when the Fed launched QE3, my guess is the Fed is pleased with the outcome thus far,” Gertler said. “A stronger economy does point to more jobs.”

Expectations of inflation as measured by the Fed’s five- year five-year forward breakeven rate, which gauges the predicted pace of consumer price increases from 2018 to 2023, rose to 2.88% on Jan. 25 from 2.63% after the FOMC meeting in September. The Fed targets inflation of 2%.

Rising stock prices may boost consumption through a so-called wealth effect, said Paul Dales, a senior U.S. economist at Capital Economics Ltd. in London. Meanwhile, increasing inflation expectations will probably stoke borrowing by reducing the “implied real interest rates,” or expected interest rates after accounting for inflation, he said.

The effectiveness of asset purchases is at the core of an FOMC debate over how long to continue the program. The minutes from the FOMC’s Dec. 11-12 meeting show participants who provided forecasts were “approximately evenly divided” between those who said it would be appropriate to end the purchases around mid-2013 and those who said they should continue beyond that date.

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