With Fed Chairman Ben Bernanke testifying yesterday before the House Budget Committee, let’s take a look back at what has transpired since QE2 was first rumored.
Rumors of QE2 started last August at the Fed’s annual Jackson Hole meeting but didn’t officially start until November. Prior to the official announcement, the New York Fed’s Brian Sack had the following to say about the intentions of QE2:
Keep longer-term interest rates lower than otherwise by reducing the aggregate amount of risk that the private markets have to bear. In particular, by purchasing longer-term securities, the Federal Reserve removes duration risk from the market, which should help to reduce the term premium that investors demand for holding longer-term securities. That effect should in turn boost other asset prices, as those investors displaced by the Fed’s purchases would likely seek to hold alternative types of securities.
Basically, the Fed was attempting to lower interest rates with the hope that this would boost the economy and boost other assets. As you can see in the chart below (via Doug Short), rates have actually risen since QE2 has gotten underway.
click to enlarge images
However, they have been successful in “boosting other asset prices.” See below (interactive graphic here):
As you can see, commodities and equities have performed well with bonds losing ground (prices move inversely to yields).
In his speech last week before the National Press Club, Bernanke seemed to claim the success of QE2 in boosting equity prices but not contributing to commodity inflation.
Emerging markets are growing very quickly for a couple of reasons. One is just the fact there has been a long-term trend for emerging markets to develop very quickly and that on the whole is a very positive development because it means that people who were in poverty are moving closer and closer to a more middle class standard of living.
But as people’s diets are becoming more sophisticated and as they eat more beef and less grains and so on, the demand for food and energy rise and that’s the primary long-term factor affecting the real price of commodities and food.
Some of the emerging markets are facing inflationary pressures because their own economies are growing perhaps even faster than their capacity.
I think it’s entirely unfair to attribute excess demand pressures in emerging markets to U.S. monetary policy because emerging markets have all the tools they need to address excess demand in those countries.”
First, to be very clear, the purpose of monetary policy easing is not to increase stock prices per se, the purpose is to strengthen the U.S. economy, put people back to work, and create price stability. But, the way monetary policy always works is through interest rates and asset prices — that’s how it always works — by changing those prices in financial markets. So yes, I do think that by taking these securities out the markets and pushing investors into alternative assets, we have led to higher stock prices and to lower stock market volatility.
His claim that QE2 has boosted equity prices but not the price of commodities seems disingenuous at best and dishonest at worst. With interest rates higher than they were before QE2 started, it appears that the program has done little to help the real economy and simply encouraged speculation in “alternative assets”.