Federal Reserve
The Federal Reserve has been following an aggressive quantitative easing (QE) strategy, buying $85 billion in bonds each month, in an attempt to stimulate markets. As a result, the Fed’s balance sheet has grown to historic proportions.
Federal Reserve Chairman Ben Bernanke recently suggested that the Fed may begin slowing or “tapering” QE (phasing down) as soon as September. This suggestion alone sent the US market into a tailspin, resulting in a total market loss of 4 percent value in 48 hours. Mortgage rates went up a full percentage point to above 4.5 percent for a 30-year loan.
What the Federal Reserve should do next is contentious, even among the various Fed governors. Some are advocating that the Federal Reserve “taper” QE out of fears that printing this much money could lead to excessive inflation. Others are saying that the economy isn’t doing well and QE is still needed.
AEI scholars John H. Makin, Stephen D. Oliner, and Desmond Lachman have been following the Fed’s actions closely. Here is a collection of their work and other selected pieces on the topic.
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As I wrote four weeks ago, the Federal Reserve is trying to figure out when the recovery has become firm enough to reduce its purchases of Treasury bonds and government-backed mortgages made under the quantitative easing program known as QE3.
The next U.S. central bank boss must end the Fed as we know it. For more than five years, the bank has fumbled its dual mandate to stabilize prices and maximize employment.
Chairman Bernanke’s testimony yesterday was yet another attempt to calm financial markets, which have been spooked by the prospect of the wind-down of the QE program.
“Chairman Bernanke’s prepared testimony broke no new ground. The Fed’s next move continues to be entirely data-dependent. If the economy evolves as the Fed has forecast, look for the tapering of QE purchases to begin in September.” Steve Oliner, former senior Fed official.
Chairman Bernanke’s dovish written testimony for the Humphrey-Hawkins hearings on the economy and Fed policy aims to make three points: tapering (less bond purchases/QE by the Fed) is not tightening; when tapering occurs depends on the economy; and zero interest rate policy, ZIRP, will continue for an extended period, probably until late 2015.
Fed Chairman Bernanke faces a tricky messaging problem for his July 17 Humphrey-Hawkins swan song before the Congress.
Rumors abound that Larry Summers could be the next chairman of the Federal Reserve. Why? What advantages does he have over the front-runner, current Fed Vice Chair Janet Yellen?
Bernanke has been rattling the markets with all his taper talk. The last thing the Fed wants is a Pavlovian response that every time the central banker talks, markets tank.
