Bernanke Explains QE2: Why Bond Buys Will Work and Won't Spark Inflation

Bernanke Explains QE2: How Quantitative Easing Will Work Without Sparking Inflation A day after the the Federal Reserve announced a second round of quantitative easing measures to stimulate the economy, Fed Chairman Ben Bernanke defended the the move in an op-ed in The Washington Post. Responding to criticism of the move, Bernanke said the stimulus will not spark inflation.

The Fed's dual mandate is "to promote a high level of employment and low, stable inflation," Bernanke writes. Today, inflation is at 2%, below the Fed's target rate. While low inflation is usually good thing, if inflation gets too low, it can morph into deflation and consequently economic stagnation, Bernanke explained. Meanwhile, unemployment is at 9.6% and the economy grew at a meager 2% rate last quarter.

"The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed," Bernanke wrote. So the Fed responded with an aggressive -- and highly anticipated -- move. With short-term rates already low, "The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011."

The idea behind this approach is that it pours more money into the banking system, which leads to lower interest rates, which will boost the kind of investment that can in turn start lowering unemployment. "Easier financial conditions will promote economic growth," Bernanke says. Lower mortgage rates will boost housing; lower bond rates will encourage investment; and higher stock prices will boost consumer wealth, which will increase spending and eventually profits to economic growth, Bernanke explains.

Bernanke acknowledges that purchases of longer-term securities and asset purchases are less familiar monetary policy tools than the Fed's usual method of raising and lowering its benchmark lending rates. "That is one reason the FOMC has been cautious," Bernanke says, promising to "review the purchase program regularly to ensure it is working as intended and to assess whether adjustments are needed as economic conditions change."

"Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation," he adds. But previous similar moves did not result in higher inflation and, he notes: "We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time."

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frank1946

This Fed Man is a front end type Hustler for the Banks...........he is the worst case scenario for a worthless Dollar AND Inflation, Milton Friedman would be amazed at the LIES and ERRORS of our Big Government, he predicted them after all. Our Financial Leaders for the past 10 years are Gamblers, addicted to ******* up to the Politicians, and Wall Street MBA's. God help the American People and those we have swindled around the World. Join a Barter Blog and get out of Debt my Friends..........ASAP !

November 17 2010 at 5:27 AM Report abuse rate up rate down Reply
sfamilyent

So, the goal is to improve employment by effectively increasing the money supply, further reducing interest rates on loans, and, encourage credit based spending and investing. In essence, attempt a controlled asset bubble with the expectation that the resulting increase in wealth will trickle down into the real Main Street economy and create jobs... While I am convinced that the value of stocks will increase, I doubt that this will have a significant affect on Main Street, and I'm dubious about the long term affects as the bubble will eventually have to wind down.

November 05 2010 at 9:37 AM Report abuse +2 rate up rate down Reply
Barb

What the heck is this guy smoking? Do they really the the American people are that stupid? He states that "Lower mortgage rates will boost housing". They have been the lowest we have seen in decades for some time now and it has done nothing to boost housing! This is all a pre-planned scam on the American people to lower the value of the dollar which, make no mistake, will absolutely result in inflation.

November 05 2010 at 9:08 AM Report abuse +2 rate up rate down Reply
tj1108

I guess we already had QE1, was it the stimulas. Then there will be a QE3, QE4 ,QE5 and about then we will have the 2012 election and end this madness.

November 05 2010 at 6:06 AM Report abuse +6 rate up rate down Reply
Robert & Lisa

Obama and thugs, wrecking our economy to force us into communism.

November 05 2010 at 4:13 AM Report abuse +7 rate up rate down Reply
Robert & Lisa

Get the Fed in the open. Audit the Fed. NO MORE LIES.

November 05 2010 at 1:37 AM Report abuse +5 rate up rate down Reply
Robert & Lisa

At this rate gold will easily be over $2,000 an ounce by Christmas and silver $50 an ounce. What do you think about your chances now with the Obama and thugs and their puppet master George Soros, America? He is the greatest liar we've ever had as President and we're all going to pay for you stupidity in voting him and his thugs in.

November 05 2010 at 1:35 AM Report abuse +7 rate up rate down Reply
1 reply to Robert & Lisa's comment
Domestic Goddess

Doubtful, MiserblOF. The more they keep printing money and monetizing the debt the lower the value of the dollar. I will take your Karma over the Weimar Republic these fools are creating.

November 05 2010 at 6:14 AM Report abuse +7 rate up rate down Reply
Robert & Lisa

If it doesn't cause inflation it will be because Americans are taking a huge standard of living decrease. Thanks Obama and thugs.

November 05 2010 at 1:28 AM Report abuse +7 rate up rate down Reply
1 reply to Robert & Lisa's comment
Steveis world

If you think obama caused all of this. You need a serious lesson in Government, ot to mention manners .

November 05 2010 at 7:37 AM Report abuse -3 rate up rate down Reply
ideszamarch

I can't imagine this working. Feeding the last of the Three little Pigs to the Wolf is insanity. This is a move, that while the wolf is chomping on the little pig, will be very tastey. You can bet your ass the Mylanta is in the cabinet and once again the public will be paying for it.

November 04 2010 at 8:02 PM Report abuse +2 rate up rate down Reply
ajgorm

The GOP took over and stocks went up on so so news we have no gas left to wind up the economy with. 600 billion is better than nothing but giving it to banks and to buy treasuries with is risky. They forgot the basics the consumer are they out to punish us. Obama might tax us on how much gas we use to drive our cars as he and Ben share ideas. Geitner is hiding somewhere.

November 04 2010 at 7:42 PM Report abuse rate up rate down Reply