Nearly all the plans of chairperson of the Federal Reserve, Ben Bernanke are running along the rails he has laid down six months previously. On 27th August 2010 while speaking at Jackson Hole in Wyoming he had chalked out his endeavours to give a fillip to economic growth, to stop prices from tumbling through buying of government bonds. Stocks have soared since then and the unemployment rate has fallen; the consumers have started to shop again.
Bill Gross of Pimco referred to the plan as a success. He manages the world’s biggest mutual fund. Gross had at one time compared the plans of Bernanke to give the economy a boost as one Ponzi scheme. But he too said, “It’s hard to dispute that since Jackson Hole the market is up around 25%”.
By next June the programme of the Treasury to buy bonds will end. Investors including Gross are concerned that the bond and stock markets will tumble without the monthly injection of $75 billion by the Feds. Gross said that by the close of June when the biggest buyer of bonds would stop doing so, the markets would get a shock.
Another issue has now cropped up. The fears of increase in food and energy prices have been now replaced with that of a double-dip-recession. In the Congressional hearing Bernanke is sure to be criticized for the quantitative easing programme of bond buying.
Apparently the speech of Bernanke at Jackson was like the Fed speaking. But the tone was to the Board of Governors at the annual meeting of the Fed was, as described by Richard Hoey of BNY Mellon, “He was saying, ‘Whatever it takes we’re going to do'”.
The step that kicked off last November was not conventional but behind it was a simple logic. By purchasing bonds the Treasury would result in borrowing become cheaper. This would cause investors to move away from the bonds with low yield to investments with greater risks like stocks. With the stock market rising the Americans would regain their confidence and start shopping again; this would lead to higher profits by the corporate sector.
Since then news has been good – unemployment has dropped in January to 9% as against 9.6% last August. The consumer price index also rose in January; so too did the stock index.
It seems QE2 has succeeded so far.