bernanke chooses least controversial way out
Last Updated : GMT 06:49:16
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Last Updated : GMT 06:49:16
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Bernanke chooses least controversial way out

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Arab Today, arab today Bernanke chooses least controversial way out

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In the end, Ben Bernanke, chairman of the Federal Reserve, chose the path of least resistance. For several weeks, Fed officials have been immersed in deep discussions about what steps, if any, they needed to take to tackle the latest, dispiriting slowdown in the US economy. The solution came on Wednesday in the form of a modest extension of “Operation Twist”, buying long-term treasuries while selling shorter duration debt, through the end of the year. “There was a lot of pressure on the Fed to move,” says Ethan Harris, North American economist at Bank of America Merrill Lynch. “So this was the easiest thing they could do — the least controversial step.”With Fed policy makers downgrading their economic forecasts by as much as they did over the past two months — shaving 0.5 percentage points off their estimates for US growth in 2012 — they had to take some action to avoid a huge disappointment among investors that risked exacerbating market turmoil. But the majority of Fed officials, aside from the most dovish, appear not yet persuaded that the US recovery is in such bad shape that it is in need of a bold, pre-emptive strike, such as a new round of asset purchase and balance sheet expansion or QE3 (Quantitative Easing 3). Continued deterioration Yet the Fed also signalled that it was ready to move in that direction if the European sovereign debt crisis worsened further and US economic data, including the next monthly jobs report in early July, shows continued deterioration. “We’re prepared to do more,” Bernanke said at the press conference following the Fed statement. “We have to get, I think, further information about the state of the economy, about where things are going, about what’s happening in Europe.” Bernanke added that more aggressive monetary stimulus would not be “launched lightly” and would require “conviction” that it was necessary. “But if we do come to that conviction, then we’ll take those additional steps,” he said. With the next Fed meeting scheduled for July 31 and August 1, the coming weeks will be dominated by a debate about both the conditions under which fresh easing should occur, as well as its form. “They really have left the door open to QE3,” said Guy Berger of RBS. But the threshold for consensus surrounding bolder steps will be much higher than it was to get Fed officials to sign off on the extension of Operation Twist. The first challenge is that monetary policy makers will have to believe that additional moves will work. Bernanke said he thought monetary policy had “some capacity to strengthen the economy by easing financial conditions” but there are doubts about the effectiveness of the two main tools still left at the Fed’s disposal. Interest rates Many worry that new asset purchases may not offer the same returns that they did in QE2 or QE1 and there are concerns that extending the guidance on “exceptionally low” interest rates from the end of 2014 to the end of 2015 may have little impact. Bernanke said further maturity extensions, as in Operation Twist, were unlikely for some time, “because we have taken that about as far as we can”. There could also be mounting election-year political pressure on the Fed, which may lead to caution. Mitt Romney, the Republican nominee, opposes QE3, as do many Republicans in Congress, and the Fed could face criticism that it is aiding Barack Obama’s re-election effort if it approves new stimulus. Bernanke will try to insulate the institution from politics as much as possible and on Wednesday said the Fed was “very serious about taking our decisions based on purely economic grounds, without political considerations”. But the US central bank may ultimately have to bite the bullet and controversially move to QE3. Harris of BofA says Wednesday’s move was merely a “down payment” towards more easing. “The problem with what the Fed has done is that it is a good way to buy time, but it’s not proportional to the risks ahead”.from gulfnews.com

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