October 1st, at 12:30pm EST, Bernanke spoke in Indianapolis, Indiana, at the Economic Club.
This was a strategic meeting for the Fed. QE3 was announced less than a month ago and there is an election approaching swiftly. In result of the unconventional methods to jolt the economy, Bernanke has faced many critics, including myself. Many republicans believe QE3 could lure inflation into the economy and according to Reuters “Mitt Romney, vowed if elected he would not renominate Bernanke”.
Ben Bernanke’s speech today is quite informative and I think you will enjoy my simple recap of it. His full speech can be seen by visiting this link.
Bernanke spoke Monday of how he had recently visited a Washington Nationals batting practice, and was introduced to one of the players. Before he could ask the player about baseball strategies, Bernanke was asked “So, what’s the scoop on quantitative easing?”.
In response and for the benefit of others, Head of the Federal Reserve, Ben Bernanke, asked and answered the following five questions, for the purpose of clarifying the “scoop on quantitative easing”. He also wants to inform those curious about the Federal Reserve.
“1. What are the Fed’s objectives, and how is it trying to meet them?
2. What’s the relationship between the Fed’s monetary policy and the fiscal decisions of the Administration and the Congress?
3. What is the risk that the Fed’s accommodative monetary policy will lead to inflation?
4. How does the Fed’s monetary policy affect savers and investors?
5. How is the Federal Reserve held accountable in our democratic society?”
Let’s dive deeper into each question and get caught up on what the Federal Reserve has in mind.
Question 1: What Are the Fed’s Objectives, and How Is It Trying to Meet Them?
Bernanke identifies that the Fed “is charged with promoting a healthy economy–broadly speaking”. He explains there are multiple means to this general goal but, today focused on the monetary policy aspect of the Fed: “But today I want to focus on a role that is particularly identified with the Federal Reserve–the making of monetary policy. The goals of monetary policy–maximum employment and price stability–are given to us by the Congress. These goals mean, basically, that we would like to see as many Americans as possible who want jobs to have jobs, and that we aim to keep the rate of increase in consumer prices low and stable.”
Bernanke reiterated, as he has many times that monetary policy is no panacea. It is not a “cure-all” but something that could and should stimulate the economy if used appropriately.
Questions 2: What’s the Relationship between Monetary Policy and Fiscal Policy?
“In short, monetary policy and fiscal policy involve quite different sets of actors, decisions, and tools. Fiscal policy involves decisions about how much the government should spend, how much it should tax, and how much it should borrow.”
Fiscal decisions involve how much the government should spend, tax, and borrow. Monetary policy, on the other hand, “mainly involves the purchase and sale of securities”.
I’d encourage you to read the full report to see what else Bernanke says concerning this topic.
Question 3: What Is the Risk that the Federal Reserve’s Monetary Policy Will Lead to Inflation?
Bernanke said: “For controlling inflation, the key question is whether the Federal Reserve has the policy tools to tighten monetary conditions at the appropriate time so as to prevent the emergence of inflationary pressures down the road. I’m confident that we have the necessary tools to withdraw policy accommodation when needed, and that we can do so in a way that allows us to shrink our balance sheet in a deliberate and orderly way. For example, the Fed can tighten policy, even if our balance sheet remains large, by increasing the interest rate we pay banks on reserve balances they deposit at the Fed. Because banks will not lend at rates lower than what they can earn at the Fed, such an action should serve to raise rates and tighten credit conditions more generally, preventing any tendency toward overheating in the economy.”
Bernanke mentions tools to “withdraw policy accommodations”, from what I see, he doesn’t specify what these tools are.
Question 4: How Does the Fed’s Monetary Policy Affect Savers and Investors?
In this section of his speech, Bernanke discusses interest rates, and how raising them would ultimately not be good for anybody at the present time. He also addresses how people who rely on investments that pay a fixed interest rate, are receiving low returns.
Question 5: How Is the Federal Reserve Held Accountable in a Democratic Society?
This is an interesting topic to bring up and I’m glad Mr. Bernanke chose to cover such a plethora of issues today.
The Federal Reserve is responsible to the Congress, according to Bernanke, to meet it’s mandated objectives (considering the Federal Reserve Act). In his speech, Bernanke also clarified the GOA’s (Government Accountability Office) sphere of oversight over the Fed.
The full report from the Fed today can be found at this link: Fed Report.
To see what other news is coming up this week, make sure you visit Winner’s Edge Trading’s Economic Calender page.
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