Ben Bernanke, out on another tour of the country to support the Fed’s policies, told “60 Minutes” that the $600 billion planned purchase of US bonds may be inadequate. “We’re not very far from the level where the economy is not self-sustaining,” Bernanke told the news show. “It’s very close to the border. It takes about 2.5 percent growth just to keep unemployment stable and that’s about what we’re getting.”
Bernanke probably made the comment without consulting his fellow Federal Reserve governors. They have supported Bernanke’s policies so far, but some have objected to the bond purchase programs. That means he may not have the support he needs to expand the fund to buy additional Treasury paper. Bernanke may find that he has spoken too soon.
The first issue with a QE3 facility is why QE2 was limited to $600 billion. The Fed and its analysts and governors have been modestly optimistic about US GDP expansion the rest of this year and into next. The Fed’s most recent Beige Book showed some very modest recovery in the job market. It has apparently only taken one report–the November unemployment numbers–to cause Bernanke to become more pessimistic about the American economy.
Bernanke said in the interview that unemployment could remain above 6% for the better part of the next decade. He sees QE2 as a way to bring down interest rates, stimulate the economy,and by that stimulation add jobs. Then a QE3, QE4, and QE5 may be needed over the next three or four years to keep the recovery on a positive track
Bernanke has fired the first shot in what is likely to be a difficult negotiation with some of the Fed’s other governors. It is also likely to enrage his opponents who believe that the purchase of bonds does nothing to help the economy because interest rates are already at nearly historic lows. Banks do not loan money because they fear risk. Companies do not add workers because they fear another recession. The purchase of another several hundred billions of dollars in Treasuries is not likely to change any of that.
Douglas A. McIntyre
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