The Fed's Mixed Messages on QE3
Federal Reserve Chairman Ben Bernanke, speaking before the Joint Economic Committee Thursday morning, refused to hint at whether or not investors can expect another round of stimulus - either in QE3 or Operation Twist - to help the struggling U.S. economy. Rep. Kevin Brady, R-TX, asked Bernanke to "look the market in the eye" and tell investors what to expect from the Fed. Bernanke refused to commit to a policy, but said the Fed could deliver an answer in the next couple of weeks. Bernanke's comments indicated that the Fed would continue to monitor the U.S. economy as needed, but that no action like another round of quantitative easing was immediately necessary. "The Committee reviews the size and composition of its securities holdings regularly and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery," Bernanke said in prepared remarks. His non-committal comments contrasted those made a day before by other Fed members, including Vice Chair Janet Yellen and San Francisco Fed President John Williams, who indicated that more stimulus by the central bank is necessary to boost the U.S. economy. "It may well be appropriate to insure against adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest," Yellen said Wednesday in a speech in Boston. Also on Wednesday Federal Reserve Bank of Atlanta President Dennis Lockhart said another round of Operation Twist could be considered. "There is capacity to do more," Lockhart in a speech in Florida. "It is certainly an option. I'm not going to speculate on what the FOMC will do." Bernanke's remarks followed the market's best daily performance of 2012. The Dow surged 287 points on Wednesday, closing at 12,414.79. Despite the mixed Fed messages, markets started off well Thursday, with each index rising more than 1% after The Peoples Bank of China announced it would cut its deposit and lending rates 0.25%, marking its first cut since 2008. To continue reading, please click here...
Federal Reserve Chairman Ben Bernanke, speaking before the Joint Economic Committee Thursday morning, refused to hint at whether or not investors can expect another round of stimulus - either in QE3 or Operation Twist - to help the struggling U.S. economy.

Rep. Kevin Brady, R-TX, asked Bernanke to "look the market in the eye" and tell investors what to expect from the Fed. Bernanke refused to commit to a policy, but said the Fed could deliver an answer in the next couple of weeks.

Bernanke's comments indicated that the Fed would continue to monitor the U.S. economy as needed, but that no action like another round of quantitative easing was immediately necessary.

"The Committee reviews the size and composition of its securities holdings regularly and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery," Bernanke said in prepared remarks.

His non-committal comments contrasted those made a day before by other Fed members, including Vice Chair Janet Yellen and San Francisco Fed President John Williams, who indicated that more stimulus by the central bank is necessary to boost the U.S. economy.

"It may well be appropriate to insure against adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest," Yellen said Wednesday in a speech in Boston.

Also on Wednesday Federal Reserve Bank of Atlanta President Dennis Lockhart said another round of Operation Twist could be considered.

"There is capacity to do more," Lockhart in a speech in Florida. "It is certainly an option. I'm not going to speculate on what the FOMC will do."

Bernanke's remarks followed the market's best daily performance of 2012. The Dow surged 287 points on Wednesday, closing at 12,414.79. Despite the mixed Fed messages, markets started off well Thursday, with each index rising more than 1% after The Peoples Bank of China announced it would cut its deposit and lending rates 0.25%, marking its first cut since 2008.

Many had hoped for a signal from Bernanke that similar actions would be taken in the United States, whether in the form of extending "Operation Twist" or the introduction of QE3. Now economists and investors must wait to see if the Fed will take action at its June 19-20 meeting.

Is QE3 Worth it?

Whether or not the markets would have rebounded from the 2008 lows without QE1 and QE2 remains a mystery. But as the accompanying chart illustrates, markets did climb after the two doses of quantitative easing and Operation Twist.

Should Operation Twist Be Extended?

Many economists, including Money Morning's Chief Investment Strategist Keith Fitz-Gerald, have been strongly outspoken against more quantitative easing, warning of its long-term effects.

"It has never worked since the dawn of recorded time and it will not work now," Fitz-Gerald said. "You cannot debase your currency and work your way out of this for anything but a short-term basis."

Rep. Brady also urged Bernanke to avoid taking more stimulus measures. Brady said the Fed had already done "too much," and its actions could push inflation to new highs.

While Bernanke did not commit to any additional stimulus on Thursday, he confirmed that maneuvers like QE3 or Operation Twist remain an option.

"The Federal Reserve remains prepared to take action as needed to protect the economy in the event that financial stresses escalate," Bernanke said in his prepared testimony.

Instead of hinting at any policy changes or lower interest rates, Bernanke called on Congress to steer the nation in a more fiscally responsible direction.

Bernanke, speaking directly to Congress, said it should work to prevent "unnecessarily impeding the current economic recovery" by avoiding the so-called fiscal cliff, a phrase coined by Bernanke himself.

Bernanke said if it was allowed to occur, the fiscal cliff would "pose a significant threat to the recovery."

He added that indecision over finding a solution to the issue - basically all in Congress' hands -- could "undermine business and household confidence."

Stay tuned for more news on QE3 or Operation Twist round two when the Fed meets in two weeks.

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