United States: So Ben Bernanke thinks QE2 is working?4 February, 2011, 2:32. Posted by Zarathustra
Tags: Ben Bernanke, Bernanke, Economy, Inflation, Quantitative Easing, United States
The Fed Chairman Ben Bernanke spoke at National Press Club. He suggested that QE2 has been working. In his own words, I quote:
Since August, when we announced our policy of reinvesting maturing securities and signalled we were considering more purchases, equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed, and inflation compensation as measured in the market for inflation-indexed securities has risen from low to more normal levels. Yields on 5- to 10-year Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases.
How awkward: Ben Bernanke seems to think that quantitative easing worked because the market reacted.
And on inflation (my recent favourite topic, because I draw a lot of charts), in his own words, I quote:
On the inflation front, we have recently seen significant increases in some highly visible prices, notably for gasoline. Indeed, prices of many commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies, coupled, in some cases, with constraints on supply. Nevertheless, overall inflation remains quite low.
Inflation is picking up, as I have suggested here and here. However, I have pointed out in that two articles that while inflation for all items will be picking up, core inflation is still very low. See the chart below showing the two measures of inflation. While the all items inflation is showing sign of picking, core inflation is still lagging behind.
Source: St. Louis Fed
So, was quantitative easing working? Ben Bernanke said it was, while I felt like part of it was buy on rumour and sell on fact as far as market reactions were concerned. As for inflation, which is really the whole point of quantitative easing, whether quantitative easing worked depends on which measure of inflation you are focusing. All item inflation, or inflation excluding food and energy?
In Bernanke’s own words, I quote:
To assess underlying trends in inflation, economists also follow several alternative measures of inflation; one such measure is so-called core inflation, which excludes the more volatile food and energy components and therefore can be a better predictor of where overall inflation is headed.
So in his own words, quantitative easing still has not created enough of inflation, even though inflation is on the rise. Companies are now stockpiling raw material as they expect higher inflation. Again, we don’t need to look elsewhere but to look at the ISM Manufacturing and Non-manufacturing Prices Indices, which are all showing rise in prices, and predict higher inflation (all item).
Source: Institute for Supply Management, St. Louis Fed
So while inflation has been on the rise, Ben Bernanke is still calling it too low.