Further to this topic, a Barron's article,
here, by Randall Forsyth discusses "
Is the Fed Mulling 'Qualitative' Easing?" Putting into print some of the talk currently circulating on the street, he begins by discussing a WSJ story by Jon Hilsenrath who said the central bank was studying announcing purchases in smaller increments and conditioned on the state of the economy.
Hilsenrath broke the story that the Fed would consider replacing maturing mortgage-backed securities rather than letting them run off; that approach was approved at the Aug. 10 meeting of the Federal Open Market Committee in order to prevent a passive tightening of monetary policy. Consequently, Hilsenrath is looked upon by most as having a reasonable degree of credibility.
The operative theory seems to be that a small-scale approach to purchasing, say, $100 billion or less per month, might bridge disagreements on the FOMC, some of whose members are reluctant to commit to a large-scale QE2 (as a second phase of quantitative easing is being dubbed) at this time, and at least one (Thomas Hoenig fo Kansas City) who is against any further easing of any kind.
Moreover, remember that the next FOMC meeting is on Nov. 2-3 and conveniently concludes the day after Election Day.
Forsyth also discusses the "Bernanke Put," the appellation ascribed by analysts at RBS to the central bank strategy of pegging the yield on longer-term Treasury securities in an attempt to stimulate the economy. In support of this strategy, Forsyth describes the RBS guys justification this way:
"
That would be more effective in bringing down long-term interest rates than massive purchases under QE2, John Richards, RBS North America head of strategy, and Eric Liverance, its head of quantitative strategy, argue in a provocative research note.
Moreover, pegging long-term yields has ample precedent and required relatively few purchases of bonds when it was practiced during World War II. Treasury bond yields were pegged at 2.5% while the federal government ran massive budget deficits to finance the war effort.
Indeed, Richards and Liverance also point out, this would be Bernanke's favored tack. In his famous speech in November 2002—in which the future Fed chairman invoked Milton Friedman's metaphor of dropping money from helicopters to describe what's now called QE—he said:
"A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt."
Thus, this is not a concept the Richards and Liverance conjured out of whole cloth. "Clearly, putting a ceiling on yields has been in Chairman Bernanke's mind for some time. Gone now are worries that the Fed will be accused of creating inflation by monetizing the debt. Indeed, low—not high—inflation has been identified as a concern requiring targeted attention," they write."
We had the Greenspan Put; perhaps now we'll have the "Bernanke Put." Your reaction to this strategy?
