5:47 AM
admin
MAKE MONEY BLOG$~It has been an obsession of anyone who follows financial markets to
try to figure out what is going on inside the Fed Chairman’s head. On
Friday, Ben Bernanke
was very explicit about what he calls unconventional monetary policy
(and we call QE), breaking down exactly how it works and how effective
it’s been. At the end of the day, said the bearded academic, two rounds
of quantitative easing helped the economy add more than two million
jobs and pushed real GDP up by almost 3%.
Why does Bernanke like quantitative easing? What are the factors that have pushed him to unleash the controversial policy? And what exactly is he expecting the policy to do?
These are very common questions, and many in the financial world have speculated as to what their correct answer is. In reality, though, Bernanke and the rest of the FOMC have been very clear about this, and the Chairman made it even more explicit on Friday at Jackson Hole, Wyoming.
Quantitative easing, or long-term asset purchases by the Fed, works essentially through three channels: the portfolio balance effect, by managing expectations, and by improving the functioning of financial markets, according to Bernanke.
The first is the most important. As the Fed expands its balance sheet, buying up apparently safe Treasuries, along with agency MBS (mortgage-backed securities), it is effectively pushing investors out of these asset classes, with the intention of forcing them to take on risk. In the Chairman’s words:
Finally, Bernanke noted “during stressful periods, asset purchases may also improve the functioning of financial markets, thereby easing credit conditions in some sectors.” While he doesn’t go further in depth, the Chairman was probably indicating that asset purchases allow the Fed to inject liquidity into specific sectors. Furthermore, that liquidity can be injected by exchanging capital for “toxic assets” such as MBS held on big banks’ balance sheets during the financial crisis.
Have the Fed’s two programs of quantitative easing, coupled with maturity extension program Operation Twist, worked?
Bernanke is very sure they have. With nominal rates already at the zero bound, QE accomplished the first tenet of monetary easing: lowering rates. Cumulatively, the $2.3 trillion in Treasury and agency MBS the Fed bought since the financial crisis, and the Twits, have pushed rates on 10-year Treasuries by 80 to 120 basis points, according to three studies conducted by the Fed referenced by Bernanke. They also “significantly” lowered yields on corporate bonds and MBS.
Another important, and controversial, effect of QE is its impact on stock prices. “[QEs] also appear to have boosted stock prices, presumably both by lowering discount rates and by improving the economic outlook; it is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC’s decision to greatly expand securities purchases,” the Chairman said at Jackson Hole.
Indeed, QE1 and 2 did boost risk assets across the globe (‘this effect is potentially important because stock values affect both consumption and investment decisions”), along with commodities and gold. Caterpillar, Deere, and other firms tied to the global economy surged in the aftermath of QE2, while embattled financials like Citigroup and Bank of America surged as well.
To respond to his critics, Bernanke enumerated a few hard facts on Friday. After noting that it’s hard to quantify the effect of these policies as the counterfactuals are not readily observable (i.e. we don’t know what would’ve happened if QE hadn’t been applied), he said:
source: forbes.com
Why does Bernanke like quantitative easing? What are the factors that have pushed him to unleash the controversial policy? And what exactly is he expecting the policy to do?
These are very common questions, and many in the financial world have speculated as to what their correct answer is. In reality, though, Bernanke and the rest of the FOMC have been very clear about this, and the Chairman made it even more explicit on Friday at Jackson Hole, Wyoming.
Quantitative easing, or long-term asset purchases by the Fed, works essentially through three channels: the portfolio balance effect, by managing expectations, and by improving the functioning of financial markets, according to Bernanke.
The first is the most important. As the Fed expands its balance sheet, buying up apparently safe Treasuries, along with agency MBS (mortgage-backed securities), it is effectively pushing investors out of these asset classes, with the intention of forcing them to take on risk. In the Chairman’s words:
The second reason, the management of expectations, is purely psychological. When the Fed announces a new round of QE, it signals that they are willing to pursue a more aggressive accommodative stance than previously thought. Investors, then, refresh their expectations of how much monetary stimulus the Fed is willing to pump, how much they will support the economy. The punch line is that Bernanke & Co. have now diminished market concerns about “tail” risks like deflation, thus increasing household and business confidence.Thus, Federal Reserve purchases of mortgage-backed securities (MBS), for example, should raise the prices and lower the yields of those securities; moreover, as investors rebalance their portfolios by replacing the MBS sold to the Federal Reserve with other assets, the prices of the assets they buy should rise and their yields decline as well. Declining yields and rising asset prices ease overall financial conditions and stimulate economic activity through channels similar to those for conventional monetary policy.
Finally, Bernanke noted “during stressful periods, asset purchases may also improve the functioning of financial markets, thereby easing credit conditions in some sectors.” While he doesn’t go further in depth, the Chairman was probably indicating that asset purchases allow the Fed to inject liquidity into specific sectors. Furthermore, that liquidity can be injected by exchanging capital for “toxic assets” such as MBS held on big banks’ balance sheets during the financial crisis.
Have the Fed’s two programs of quantitative easing, coupled with maturity extension program Operation Twist, worked?
Bernanke is very sure they have. With nominal rates already at the zero bound, QE accomplished the first tenet of monetary easing: lowering rates. Cumulatively, the $2.3 trillion in Treasury and agency MBS the Fed bought since the financial crisis, and the Twits, have pushed rates on 10-year Treasuries by 80 to 120 basis points, according to three studies conducted by the Fed referenced by Bernanke. They also “significantly” lowered yields on corporate bonds and MBS.
Another important, and controversial, effect of QE is its impact on stock prices. “[QEs] also appear to have boosted stock prices, presumably both by lowering discount rates and by improving the economic outlook; it is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC’s decision to greatly expand securities purchases,” the Chairman said at Jackson Hole.
Indeed, QE1 and 2 did boost risk assets across the globe (‘this effect is potentially important because stock values affect both consumption and investment decisions”), along with commodities and gold. Caterpillar, Deere, and other firms tied to the global economy surged in the aftermath of QE2, while embattled financials like Citigroup and Bank of America surged as well.
To respond to his critics, Bernanke enumerated a few hard facts on Friday. After noting that it’s hard to quantify the effect of these policies as the counterfactuals are not readily observable (i.e. we don’t know what would’ve happened if QE hadn’t been applied), he said:
U.S. equity markets were initially thrown off by Bernanke’s prepared remarks, erasing previous gains and flirting with falling into negative territory. It took market players a few minutes to digest the speech, and actually notice that Bernanke was mounting a solid defense of his policies. While he didn’t hint at timing, he made it clear that they worked and, given he’s not fulfilling his dual mandate (as the unemployment rate remains at more than two percentage points above what the FOMC is comfortable with), he won’t hesitate to use them again in the near future. “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability,” he concluded.¨A study using the Board’s FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.
source: forbes.com
Posted in: 
0 comments:
Post a Comment