Chairman Bernanke demonstrates that he believes nontraditional monetary policy measures are effective; that their risks can be managed; and that current conditions, especially in the labor market, justify their further use.
-David Joy, chief market strategist, Ameriprise
If it is a mistake to ignore the financial market effects of potential new central bank actions, despite widespread skepticism about their efficacy at this stage of the recovery, then a close examination of last week's speech by Federal Reserve Chairman Ben Bernanke at the Kansas City Fed's economic symposium is in order.
In that speech, Chairman Bernanke outlined the case for nontraditional policy accommodation, while stopping short of making any commitment to implement additional measures.
The Chairman began by reviewing the Fed's experience with policy initiatives in two areas in response to the financial crisis: asset purchases employed once the overnight rate had been effectively lowered to zero, and communications. In defending the effectiveness of the asset purchase programs, otherwise known as quantitative easing, he cited studies that concluded that the interest rate on the ten-year treasury note had been lowered by a cumulative total of between 80 and 120 basis points as a result, with similar effects on agency and private sector debt securities, while also raising equity prices. He also cited Fed model simulations that show that the asset purchase programs raised economic output by three percent and created two million jobs beyond what otherwise would have been the case.
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