We first made this post back on July 13th, 2011 and we are reprinting it today.
Whether the Federal Reserve likes it or not, its unprecedented monetary polices over the last few years have conditioned the financial markets to expect a helping hand when the going gets tough.
With the stock market mired in a month-long slump and both the U.S. and euro zone economies in danger of sliding into recession, investors are bracing for a possible repeat of last year's performance, when Bernanke hinted the Fed would act if conditions deteriorated.
Two months later, the central bank began pumping $600 billion into the financial system through direct purchases of Treasury debt, a second round of stimulus that markets dubbed "QE2."
So there has been considerable debate about whether or not there will be a third round of Quantitative Easing by the US Federal Reserve.
Back in July US Federal Reserve Chairman Ben Bernanke appeared before Congress and here is how the appearance was reported:
- While the Federal Reserve believes that the temporary shocks holding down economic activity will pass, the central bank is examining several untested means to stimulate growth if conditions deteriorate, including another round of asset purchases, dubbed QE3, Fed chairman Ben Bernanke said Wednesday in remarks prepared for the House Financial Services Committee. Bernanke discussed three approaches to further easing in his prepared remarks. One option, Bernanke said, would be for the Fed to provide more "explicit guidance" to the pledge that rates will stay low for "an extended period." Another approach would be another round of asset purchases, or quantitative easing, or for the Fed to "increase the average maturity of our holdings." Finally, the Fed could also reduce the quarter percentage point rate of interest that it pays to banks on their reserves, "thereby putting downward pressure on short-term rates more generally." Bernanke was clear to stress that easing was not the only option under consideration and that the next Fed move could well be to tighten.
Back in July Forbes took a look back at some of Bernanke's speeches and believes they have pieced together what is coming.
- #1: Expand the scale of asset purchases;
- #2: Expand the menu of assets the Fed buys.
- #3: A commitment to holding the overnight rate at zero for some specified period.
- #4: Announcement of explicit ceilings on longer-maturity Treasury debt.
- #5: Directly influencing the yields on privately issued securities.
- #6: Purchase foreign government debt.
- #7: Tax cuts accommodated by a program of open market purchases.
- What’s been fascinating, and what was unappreciated by me in the early stages, was the enormous number of derivatives that have been created in the financial system. Because of the derivatives they’ve been able to keep this thing going for infinitely longer than any rational mind would have thought possible. You’ve been able to create leverage to the extent that you’ve never seen before and this is why I think the bubbles were able to get stretched out and last as long as they did. Because the balloon was blown up so much, I just think the aftermath in its finale is going to be extraordinarily unpleasant.”
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