Bernanke: Fed Could Unleash More QE If We Go Over The Fiscal Cliff

In his post-FOMC press conference, Fed Chairman Ben Bernankedefended his policy ofopen-ended asset purchases, dubbed QE4, and explained the benefits of their new, outcome-based guidance. 

Bernanke also said he’d be glad to “wave a magic wand and get unemployment down to 5%,” but told reporters the Fed’s policy tool kit is limited, adding they don’t “have the tools to offset” the fiscal cliff.  Bernanke also avoided questions about his future as the U.S.’s central banker.

After an historic FOMC decision that saw the Fed embark in further asset purchases, worth $85 billion-a-month, and unveil a new forward guidance, Chairman Bernanke faced reporters and justified his policy decisions. While Bernanke repeated once again that the Federal Reserve remains equally committed to lowering the unemployment rate and fostering price stability, the Chairman highlighted the worrisome state of the labor market, noting it represented an “enormous waste of human and economic potential.”

The FOMC voted for “significant additional action” to provide monetary support for the economy, deciding to add $45 billion in unsterilized Treasury purchases to the $40 billion program to buy mortgage-backed securitiess.  The Fed “followed through” on their commitment after the September meeting, Bernanke said, as labor markets haven’t presented a sustained and substantial recovery in the meantime.  Monetary stimulus, the Chairman explained, comes from taking Treasuries and RMBS out of the market, effectively forcing investors into risky assets.

Wednesday saw the Fed decide to set numerical thresholds for joblessness and inflation for the first time ever.  Bernanke told reporters that they decided to tie the future path of the Federal Funds rate to the unemployment rate falling below 6.5% and inflation projections staying below 2.5% two years out as it was more “transparent.”  Asset purchases, he explained, are used to create near-term momentum for the economy, while the Federal Funds rate maintains the desired level of support.

Asked if the Fed was doing everything it could, even three-and-a-half years after the recovery began, the Chairman defended his tenure, saying “if you could wave a magic wand and get unemployment down to 5%, obviously we would do that.”  Yet asset purchases remained a mysterious tool, and the Fed pays particular attention to their possible side effects.

Speaking specifically about the fiscal cliff, the Chairman reiterated his view that the Fed doesn’t have the firepower to offset its negative effects.  Exhorting Congress to “do no harm” and find a solution, Bernanke admitted the Fed could “maybe increase [QE] a little.”  Monetary policy “has its limits […] only the private and public sector working together [will get the economy going],” he added.

Several reporters asked the Chairman about the Fed’s exit strategy.  Bernanke said it would be gradual, and that the thresholds laid out in the latest FOMC statement are “not a target [but] a guide-point” as to when the Fed could begin to tighten policy and raise rates.

Bernanke was also asked about his future as Fed Chairman.  Reports indicated Bernanke is considering whether to step down in 2014 as his mandate comes to an end.  The Chairman said he’s focused on his current job rather than thinking about his future at the central bank.

Risk assets rallied as the FOMC statement was released, but fell gradually as the Chairman gave his press conference.  The yield on 10-year Treasuries rose to 1.70% while gold gained 0.2% to $1,711.60 an ounce.  Major financial names like Citigroup, Bank of America, andJPMorgan Chase followed the path of the general stock markets, sliding toward the close.

Under Bernanke, the Fed has indeed gone above and beyond in their attempts to support a frail economic recovery.  Beyond several rounds of quantitative easing and the pledge to keep rates zero-bound for a long-time, Bernanke & Co. have unveiled a new type of guidance.  Whether that changes anything is yet to be seen, as the global economy faces a plethora of headwinds including the fiscal cliff, the European sovereign debt crisis, and a slowdown in China.  At least Bernanke realizes he doesn’t have a magic wand that can solve all of those.

source: forbes.com

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