–QE Approach ‘Looks to be Effective Again’
–Some Concerns About Q-E ‘Overstated;’ Can Unwind When Appropriate
–Spare Capacity Gives Fed Room for New Support of the Economy
–Earlier Q-E Had Little Efect on the Money Supply and Inflation
–‘We Could Hardly Be Satisfied’

By Denny Gulino

WASHINGTON (MNI) – In a surprise defense of QE2, Federal Reserve
Chairman Ben Bernanke Wednesday night said the additional accommodation
“will” help housing, encourage investment, boost stock prices and
consumer wealth, help increase spending, incomes, profits and
confidence — further supporting economic expansion.

Bernanke’s language was exceptionally positive — perhaps
unprecedentedly so for a Federal Reserve chief — and unusually direct
and explicitly hopeful for the head of any central bank. Instead of
using “may” Bernanke chose to declare that the QE2 authorized earlier in
the day “will” bring about a wide array of benefits.

In an opinion piece written for publication in the Washington Post
just hours after the FOMC announced its decision in favor of QE2,
Bernanke said, “Easier financial conditions will promote economic
growth” and “for example,” will lower mortgage rates further to “make
housing more affordable and allow more homeowners to refinance.”

He continued, “Lower corporate bond rates will encourage
investment. And higher stock prices will boost consumer wealth and help
increase confidence, which can also spur spending.” To add to the
benefits, “Increased spending will lead to higher incomes and profits
that, in a virtuous circle, will further support economic expansion.”

Bernanke also was as strong in his answer to the criticisms of some
of the members of his own Federal Open Market Committee, most notably,
Kansas City Federal Reserve Bank President Thomas Hoenig. He once again
dissented from an FOMC decision that in the afternoon triggered a plan
to purchase an additional $600 billion of longer-term Treasury
securities by mid 2011 along with the continued reinvestment of
repayments of principal on its holdings of securities.

To Hoenig, the Richmond Fed’s Jeffrey Lacker, the Philly Fed’s
Charles Plosser, the Minneapolis Fed’s Narayana Kocherlakota and the
Dallas Fed’s Richard Fisher, Bernanke said flatly, “Some concerns about
this approach are overstated.”

The earlier use of quantitative ease “had little effect on the
amount of currency in circulation or on other broad measures of the
money supply, such as bank deposits,” Bernanke said. “Nor did it result
in higher inflation.”

The Fed has made “all necessary preparations, and we are confident
that we have the tools to unwind these policies at the appropriate
time,” he continued. “The Fed is committed to both parts of its dual
mandate and will take all measures necessary to keep inflation low and
stable.”

He said, “The FOMC has been cautious, balancing the costs and
benefits before acting” and “will review the purchase program regularly
to ensure it is working as intended and to assess whether adjustments
are needed as economic conditions change.”

Why QE2? Because, he said, “the Federal Reserve has a particular
obligation to help promote increased employment and sustain price
stability” because of its two mandates prescribed by Congress. “Steps
taken this week should help us fulfill that obligation.”

The Fed, he said, “is committed to both parts of its dual mandate
and will take all measures necessary to keep inflation low and stable.”

As Bernanke described it, the FOMC had to act given the room made
available for more accommodation by the continuing slack in the economy.

“Two years have passed since the worst financial crisis since the
1930s dealt a body blow to the world economy,” he wrote. “Working with
policymakers at home and abroad, the Federal Reserve responded with
strong and creative measures to help stabilize the financial system and
the economy,” including “a dramatic easing of monetary policy —
reducing short-term interest rates nearly to zero.”

Already the Fed has “purchased more than a trillion dollars’ worth
of Treasury securities and U.S.-backed mortgage-related securities,
which helped reduce longer-term interest rates, such as those for
mortgages and corporate bonds.” Thanks to those steps, an end came to
“the economic free fall,” setting the state “for a resumption of
economic growth in mid-2009.”

It wasn’t enough, he said. “Notwithstanding the progress that has
been made, when the Fed’s monetary policymaking committee — the Federal
Open Market Committee (FOMC) — met this week to review the economic
situation, we could hardly be satisfied.”

“Unfortunately, the job market remains quite weak; the national
unemployment rate is nearly 10 percent, a large number of people can
find only part-time work, and a substantial fraction of the unemployed
have been out of work six months or longer.” Those heavy costs “include
intense strains on family finances, more foreclosures and the loss of
job skills.”

“Today,” Bernanke wrote, “most measures of underlying inflation are
running somewhat below 2 percent, or a bit lower than the rate most Fed
policymakers see as being most consistent with healthy economic growth
in the long run.”

“Although low inflation is generally good, inflation that is too
low can pose risks to the economy — especially when the economy is
struggling” and in the most extreme case, “very low inflation can morph
into deflation (falling prices and wages), which can contribute to long
periods of economic stagnation.”

Even without those risks, he said, “low and falling inflation
indicate that the economy has considerable spare capacity, implying that
there is scope for monetary policy to support further gains in
employment without risking economic overheating.”

And so, he said, “The FOMC decided this week that, with
unemployment high and inflation very low, further support to the economy
is needed.”

Quantitative ease helped financial conditions in the past “and, so
far, looks to be effective again. Stock prices rose and long-term
interest rates fell when investors began to anticipate this additional
action.”

Concluding what appeared to be a statement remarkable for its
absence of Bernanke’s characteristic reserve and its confidence in the
path chosen by the FOMC, he said, “The Federal Reserve cannot solve all
the economy’s problems on its own. That will take time and the combined
efforts of many parties, including the central bank, Congress, the
administration, regulators and the private sector.” But, he said, the
Fed has “a particular obligation to help promote increased employment
and sustain price stability. Steps taken this week should help us
fulfill that obligation.”

** Market News International Washington Bureau: 202-371-2121 **

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