Uh-oh. Federal Reserve Chairman Ben Bernanke is thinking again. The central bank elites recently had a confab in posh Jackson Hole, Wyoming, where a consensus emerged that the Bernanke team is pondering another round of “Quantitative Easing” (QE). (One wonders if they would get better results if they hobnobbed in less upscale places, like Cleveland.)
Don’t get me wrong. Bernanke is a dedicated public servant, and has occupied the helm of the Fed during some of the most challenging moments in our economic history. But non-economists (most of us) know that the credentialed elites work for us (thank you, Clint Eastwood) and have to divine as best we can whether their nostrums are working.
The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves).
Under Quantitative Easing, the central bank conducts massive purchases of treasury securities. The demand drives bond prices up, and thus yields down (yield is determined by the mathematical relationship between a bond’s price and its coupon). Since treasury yields are a hugely important reference framework for the entire bond market, as they decline interest rates fall across the board.
Alas, massive rounds of QE in the past have had less than stellar results. While QE was almost certainly necessary to unfreeze the credit markets at the height of the 2008 meltdown, continuing doses of it don’t seem to work very well. We are in stagnation hell with high unemployment (currently in the 8% range) and anemic economic growth, generally below 2% annually.
Clearly, the American public needs to use our common sense to try and figure out why it isn’t working. Stay tuned.