The Fed to cool Bernanke’s QE down

In what is considered to have been one of his last appearances as a Federal Reserve chairman, Ben Bernanke hinted at the possibility that he might order the expansion of his quantitative easing–QE–policy. That would be Bernanke’s QE 3, then. But he also said it could go the other way around, because the US economy shows no clear progression. Bernanke’s words weren’t clear, either.

Analysts are trying to decipher his message. The main reason for Bernanke to have turned so ambiguous would be that conditions of purchasing public debt have changed because, in spite of the austerity measures implemented to cut the federal deficit, job creation and private consumption seem to have a strong resilience.

The discussion about when the Fed should slow down its money-printing strategies, consequently, is wide open. Markets expect that asset-buy programmes will be moderate in the next months.

If it happens, this would be the first signal that the US needs a different monetary policy. Yet, federal funds’ main interest rates, currently at 0% and 0.25%, are likely to remain untouched. Why? The Fed explained it wouldn’t increase them unless unemployment rate falls to 6.6% (currently at 7.7%) and inflation rises to 2%, double of today’s figure.

For public debt markets, though, the change would be a considerable one, because the Fed’s demand has reduced the cost of credit for the federal government. The new trend could bring higher yields on long-term bonds and Treasury paper in general, and the appreciation of the dollar against the euro. And that could be too much to cope with, for the US economy, right at this moment.