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10/05/2012

Bernanke's Thinking

Just a flavor of the Fed’s thinking these days. I’ll reserve comment for my “Week in Review” column.

Federal Reserve Chairman Ben Bernanke on QE3

From his press conference on September 13, 2012…in response to why the Fed feels QE3 is required, the presumed impact. I edited this rough transcript from forexlive.com to read better grammatically.

Bernanke: The ultimate effect is going to depend, of course, on how much [bond buying] we end up doing and that in turn depends on what the economy is going to do. This is a conditional program. We’re going to be providing accommodation according to how the economy evolves. I think that the virtue of putting it this way is that if the economy is weaker we’ll provide more support. If the economy strengthens on its own or other head winds die down, then it will require less support so the amount of support we provide depends on how the economy evolves.

We do think that these policies can bring interest rates down, not just treasury rates but a whole range of rates including mortgage rates and rates for corporate bonds and other types of important interest rates. It also affects stock prices. It affects other prices, home prices, for example. So looking at all the different channels of effect, we think it does have an impact on the economy; will have an impact on the labor market but again, the way I would describe it is a meaningful effect, a significant effect, but not a panacea, not a solution for the whole issue. We’re just trying to get the economy moving in the right direction to make sure that we don’t stagnate at high levels of unemployment, that we’re making progress towards more acceptable levels of unemployment.

---

Bernanke: The problem is that for this purpose what we’re looking for is a general improvement in the labor market. We want to see the unemployment rate come down, but that’s not the only indicator, obviously, of labor market conditions. The unemployment rate came down last month [Ed. August] because participation fell. That’s not necessarily a sign of improvement. So we want to see more jobs. We want to see lower unemployment. We want to see a stronger economy that can cause the improvement to be sustained. It’s not just a one month or two-month phenomenon. We’re not going to be looking for little wiggles in the numbers that’s going to cause us to radically shift our policy. So we at least at this point have decided to define it qualitatively. I hope I’m giving you at least a little color in terms of what we’ll be looking for. We’ll be looking for again an economy which is quickening, that gives signs of continuing improvement, that allows labor markets to be stronger. And that will be the type of qualitative criteria that we look at. We don’t – again, we don’t have a single number that captures that, but we anticipate that we’ll have to do more and we’ll do enough to make sure the economy gets on the right track.

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Chairman Bernanke, Oct. 1, 2012

In a speech to the Economic Club of Indiana, Bernanke addressed the issue of “How does the Fed’s monetary policy affect savers and investors?”

Bernanke: The concern about possible inflation is a concern about the future. One concern in the here and now is about the effect of low interest rates on savers and investors. My colleagues and I know that people who rely on investments that pay a fixed interest rate, such as certificates of deposit, are receiving very low returns, a situation that has involved significant hardship for some.

However, I would encourage you to remember that the current low levels of interest rates, while in the first instance a reflection of the Federal Reserve’s monetary policy, are in a larger sense the result of the recent financial crisis, the worst shock to this nation’s financial system since the 1930s. Interest rates are low throughout the developed world, except in countries experiencing fiscal crises, as central banks and other policy makers try to cope with continuing financial strains and weak economic conditions.

A second observation is that savers often wear many economic hats. Many savers are also homeowners; indeed, a family’s home may be its most important financial asset. Many savers are working, or would like to be. Some savers own businesses, and – through pension funds and 401(k) accounts – they often own stocks and other assets. The crisis and recession have led to very low interest rates, it is true, but these events have also destroyed jobs, hamstrung economic growth, and led to sharp declines in the values of many homes and businesses. What can be done to address all of these concerns simultaneously? The best and most comprehensive solution is to find ways to a stronger economy. Only a strong economy can create higher asset values and sustainably good returns for savers. And only a strong economy will allow people who need jobs to find them. Without a job, it is difficult to save for retirement or to buy a home or to pay for an education, irrespective of the current level of interest rates.

The way for the Fed to support a return to a strong economy is by maintaining monetary accommodation, which requires low interest rates for a time. If, in contrast, the Fed were to raise rates now, before the economic recovery is fully entrenched, house prices might resume declines, the values of businesses large and small would drop, and, critically, unemployment would likely start to rise again. Such outcomes would ultimately not be good for savers or anyone else.

Source: federalreserve.gov

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Wall Street History will return in two weeks.

Brian Trumbore



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Wall Street History

10/05/2012

Bernanke's Thinking

Just a flavor of the Fed’s thinking these days. I’ll reserve comment for my “Week in Review” column.

Federal Reserve Chairman Ben Bernanke on QE3

From his press conference on September 13, 2012…in response to why the Fed feels QE3 is required, the presumed impact. I edited this rough transcript from forexlive.com to read better grammatically.

Bernanke: The ultimate effect is going to depend, of course, on how much [bond buying] we end up doing and that in turn depends on what the economy is going to do. This is a conditional program. We’re going to be providing accommodation according to how the economy evolves. I think that the virtue of putting it this way is that if the economy is weaker we’ll provide more support. If the economy strengthens on its own or other head winds die down, then it will require less support so the amount of support we provide depends on how the economy evolves.

We do think that these policies can bring interest rates down, not just treasury rates but a whole range of rates including mortgage rates and rates for corporate bonds and other types of important interest rates. It also affects stock prices. It affects other prices, home prices, for example. So looking at all the different channels of effect, we think it does have an impact on the economy; will have an impact on the labor market but again, the way I would describe it is a meaningful effect, a significant effect, but not a panacea, not a solution for the whole issue. We’re just trying to get the economy moving in the right direction to make sure that we don’t stagnate at high levels of unemployment, that we’re making progress towards more acceptable levels of unemployment.

---

Bernanke: The problem is that for this purpose what we’re looking for is a general improvement in the labor market. We want to see the unemployment rate come down, but that’s not the only indicator, obviously, of labor market conditions. The unemployment rate came down last month [Ed. August] because participation fell. That’s not necessarily a sign of improvement. So we want to see more jobs. We want to see lower unemployment. We want to see a stronger economy that can cause the improvement to be sustained. It’s not just a one month or two-month phenomenon. We’re not going to be looking for little wiggles in the numbers that’s going to cause us to radically shift our policy. So we at least at this point have decided to define it qualitatively. I hope I’m giving you at least a little color in terms of what we’ll be looking for. We’ll be looking for again an economy which is quickening, that gives signs of continuing improvement, that allows labor markets to be stronger. And that will be the type of qualitative criteria that we look at. We don’t – again, we don’t have a single number that captures that, but we anticipate that we’ll have to do more and we’ll do enough to make sure the economy gets on the right track.

---

Chairman Bernanke, Oct. 1, 2012

In a speech to the Economic Club of Indiana, Bernanke addressed the issue of “How does the Fed’s monetary policy affect savers and investors?”

Bernanke: The concern about possible inflation is a concern about the future. One concern in the here and now is about the effect of low interest rates on savers and investors. My colleagues and I know that people who rely on investments that pay a fixed interest rate, such as certificates of deposit, are receiving very low returns, a situation that has involved significant hardship for some.

However, I would encourage you to remember that the current low levels of interest rates, while in the first instance a reflection of the Federal Reserve’s monetary policy, are in a larger sense the result of the recent financial crisis, the worst shock to this nation’s financial system since the 1930s. Interest rates are low throughout the developed world, except in countries experiencing fiscal crises, as central banks and other policy makers try to cope with continuing financial strains and weak economic conditions.

A second observation is that savers often wear many economic hats. Many savers are also homeowners; indeed, a family’s home may be its most important financial asset. Many savers are working, or would like to be. Some savers own businesses, and – through pension funds and 401(k) accounts – they often own stocks and other assets. The crisis and recession have led to very low interest rates, it is true, but these events have also destroyed jobs, hamstrung economic growth, and led to sharp declines in the values of many homes and businesses. What can be done to address all of these concerns simultaneously? The best and most comprehensive solution is to find ways to a stronger economy. Only a strong economy can create higher asset values and sustainably good returns for savers. And only a strong economy will allow people who need jobs to find them. Without a job, it is difficult to save for retirement or to buy a home or to pay for an education, irrespective of the current level of interest rates.

The way for the Fed to support a return to a strong economy is by maintaining monetary accommodation, which requires low interest rates for a time. If, in contrast, the Fed were to raise rates now, before the economic recovery is fully entrenched, house prices might resume declines, the values of businesses large and small would drop, and, critically, unemployment would likely start to rise again. Such outcomes would ultimately not be good for savers or anyone else.

Source: federalreserve.gov

---

Wall Street History will return in two weeks.

Brian Trumbore