It’s now clear that additional stimulus is not off the table. But is the table already set?
“We’re not proposing anything today”, according to Fed Chairman Ben Bernanke (emphasis mine), on his second day on Capitol Hill last week.
And with that, the question on the markets’ collective mind… whether the Fed will unleash another round of quantitative easing (QE)… was left open following the Fed Chairman’s testimony to Congress on monetary policy.
On the first day, Bernanke hinted that more stimulus was on the radar: “The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support”.
Then on the second day, Bernanke backpedaled…ever so slightly: “We are not prepared at this point to take further action” (emphasis mine, again).
And all of this comes as former Fed Chairman Alan Greenspan openly criticized the first two rounds of accommodative policy (which amount to $2 trillion): “There is no evidence that huge inflow of money into the system basically worked…not only QE2 but QE1”.
Effective or not, given all the stimulus already implemented, what can the Fed do now?
Plenty. “…We have a number of ways in which we could act to ease financial conditions further”, according to Bernanke.
There are three possibilities. The Fed could: 1) launch the purchase of more Treasury securities, 2) provide more clarity on its commitment to maintain low interest rates, or 3) lower the interest rate paid on bank reserves to encourage lending.
The bottom line: “…This is a serious situation. It involves significant loss of human and economic potential. We want to make sure we have the options when they become necessary”.
Yes, he said “when”, not ‘if ’.