5questions Bernanke’s speech may answer
1.) Will the Fed buy more bonds? That’s the obvious one, after the central bank bought $1.7 trillion worth of mortgage securities between Dec. 2008 and March 2010, and then another $600 billion of Treasurys between November and June. QE1, as it’s now called, was an unequivocal success; QE2, somewhere between a mild positive or a mild negative, depending who you ask. Bernanke told Congress this was an option in July, and the statement made by the Fed on Aug. 9 left the option open.
2.) Will the Fed lengthen the duration of the bond portfolio it already holds? Some analysts dub this approach “Operation Twist 2.0,” and Bernanke mentioned the possibility in a speech to Congress in July and talked at length about the approach way back in 2002. The first Operation Twist was from way back in the days of JFK, when the Fed sold short-term Treasurys and bought long-term bonds. The gist of the idea is to bring the yields on long-term bonds lower, so as to encourage investment; then again, the 30-year yield was less than 3.60% on Thursday, so the impact could be limited.
3.) Will the Fed cut the interest it pays banks that park money at the central bank? This is another option, by the way, that Bernanke discussed in July. The idea here would be to reduce the incentive banks have to sit on, rather than lend, the money in their vaults. Given the Fed only pays a quarter-point of interest, it’s unclear how successful that approach could be – unless the Fed starts charging banks for sitting on the sidelines.
4.) Will the Fed set an inflation target? This is a policy option with benefits to hawks and doves alike. Setting an explicit numerical target for inflation could reduce fears that the Fed’s QE programs will trigger outsized inflation. For the doves, however, a formal inflation target could mean the Fed would be pushed into action when prices weren’t advancing as quickly as the goal suggests. A more radical inflation target, suggested by New York Fed President William Dudley, would be to allow a “catch-up” period of above-target inflation when price growth misses a target for an extended period of time.
5.) What on earth is going on with the economy? The Fed really hasn’t addressed this fairly pertinent topic. It said earlier this month that, in effect, the economy will be lousy for two years, but it didn’t say why, other than it wasn’t simply due to the earthquake in Japan or the commodity price appreciation seen earlier in the year.
- Markets await key Bernanke speech (bbc.co.uk)
- Economic challenge (bbc.co.uk)
- What Do Markets Expect From Bernanke at Jackson Hole? (blogs.wsj.com)
- The Fed & Jackson Hole: ‘Hope Springs Eternal’ (blogs.wsj.com)
- Will There be QE3, The FED’s Options & How to Tell If QE3 Is Coming (asiawealthmanagement.wordpress.com)