The Fed's much-anticipated second round of "quantitative easing" has begun. Called QE2 by the wonks and analysts, it's basically about increasing the money supply by having the government buy $600 billion worth of assets. It's not the same as Roosevelt/Keynes-style fiscal stimulus. Bernanke's plan is a bit less orthodox and a bit more politically feasible, in the view of commentators we covered earlier this week . Early reaction to the roll-out has been mixed, with some delighted at the markets' positive response and others worried that the price of basic goods will rise. Bernanke himself appears in The Washington Post Thursday just to clear some matters up.
- 'What the Fed Did and Why' We've been in a period of low inflation, explains Bernanke, and though that can be good, "inflation that is too low can pose risks to the economy--especially when the economy is struggling," and deflation becomes a serious risk. "Even absent such risks, low and falling inflation indicate that the economy has considerable spare capacity, implying that there is scope for monetary policy to support further gains in employment without risking economic overheating." Hence the $600 billion purchase. He points out that it's looking good so far: "stock prices rose and long-term interest rates fell." He also says that though "asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated." He's "confident" the Fed can "unwind these policies at the appropriate time." His conclusion calls for help from other parts of the government:
The Federal Reserve cannot solve all the economy's problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector.
- This Looks Like a Scared Fed Chairman This op-ed "is a sign of how nervous the Fed is about its decision," suggests 24/7 Wall St.'s Douglas McIntyre, calling Bernanke's "defending his policies in public" a "remarkable move."
- As Well He Should Be: Watch Out for Skyrocketing Flour Prices The dollar has indeed fallen as intended, notes Charles Hugh Smith at DailyFinance, but "intended or not, the Fed's destruction of the dollar's value has pushed prices of commodities that Americans need--such as instance food, cotton and oil--higher." So here's the problem:
While the Fed's policy is supposed to help the economy by encouraging more borrowing, the actual effect is to raise prices for companies and consumers alike, and to squeeze the very corporate profits that have been driving stocks higher.
- Give the Fed a Break The Economist's Ryan Avent notices Bernanke's "ever-so-slight nod toward an admission that the announced purchases won't get the American economy all the way back to where it needs to be, and that the Fed could use some help from fiscal policy." Avent has been a vocal defender of QE2, and continues by pointing to the fact that, since the official announcement, "treasury yields have fallen, equity markets have risen, and the dollar has tumbled." In addition, "the Fed seems to have managed to deliver a bit more than markets were expecting," buoying stocks in America, Asia, and Europe. His bottom line:
It's not clear that any Fed action could get the American economy back to full employment by the end of 2011. But one needn't rely on faith to think that QE2 will (continue to) boost the American economy. It's enough to trust one's eyes.
- Remarkable That the Fed Is Acting Without Signs of a Crisis "The announcement of QE2 has broken new ground not so much in its initial quantum," argues Goldman Sachs alum and former "external adviser to the British Treasury" Gavyn Davies at the Financial Times, "but in the fact that the Fed is willing to embark on this unconventional programme in the absence of any obvious financial or economic emergency." What's interesting about the move is that it is made "in the face of recent economic data which are definitely not indicative of a double dip in the economy."