Federal Reserve Chairman Ben Bernanke suggested that the Fed might continue its asset purchase program. This is only if economic developments indicate that an adjustment in the stance of monetary policy would be appropriate.
Speaking before Congress yesterday, Bernanke said that a new stimulus program is in the works that could entail additional asset purchases.
The Fed's previous purchase programs of Treasury securities boosted the prices of such securities and caused longer-term Treasury yields to be lower than they would have been otherwise.
In June, the Fed completed its planned purchases of $600 billion in longer-term Treasury securities that the Committee initiated in November, while continuing to reinvest the proceeds of maturing or redeemed longer-term securities in Treasurys.
The second round of asset purchases lowered longer-term interest rates approximately 10 to 30 basis points.
"Our analysis further indicates that a reduction in longer-term interest rates of this magnitude would be roughly equivalent in terms of its effect on the economy to a 40 to 120 basis point reduction in the federal funds rate," he said.
Bernanke said that the Fed's purchases also induced private investors to acquire other assets that serve as substitutes for Treasury securities in the financial markets such as corporate bonds and MBS.
"By this means, the Fed's asset purchase program — like more conventional monetary policy —has served to reduce the yields and increase the prices of those other assets as well," he said as part of his testimony. "The net result of these actions is lower borrowing costs and easier financial conditions throughout the economy."
Even including the disappointing readings for May and June, private payroll gains have averaged 160,000 per month in 1H11, compared with average increases of only about 80,000 private jobs per month from May to August 2010.
Deutsche Bank Securities analysts said in a report this week that with stable to lower unemployment, growth still above 2.5% and higher and rising core inflation, the case for additional asset purchases would be difficult to make unless a more serious and persistent demand shock shifts the unemployment and core PCE trajectories.
"Given current economic conditions, additional QE in either the U.S. or the U.K. is unlikely," Deutsche Bank analysts said. "However, beyond the normalization of the supply chain disruptions, the global economy may on the margin get some support from the oil QE1, an unspent fiscal stimulus in the U.S. and more importantly, a relaxation of credit conditions in China."
According to Deutsche Bank, the quantitative easing in the oil market decided by the U.S. government and other International Energy Agency members who agreed to release strategic oil reserves might be a belated attempt at reducing the risk premium in the oil market.
Bernanke said in his testimony that once the temporary shocks that have been holding down economic activity pass, it is likely that the effects of policy accommodation will be reflected in stronger economic activity and job creation.
Nonetheless the Fed remains prepared to respond should economic developments indicate that an adjustment in the stance of monetary policy would be appropriate.
As part of its response, the Fed said it will again be open to another round of securities purchases or to increase the average maturity of its current holdings.