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Not much of a confrontation today between Ron Paul and Federal Reserve Chairman Ben Bernanke as Rep Paul did most of the talking; I would have preferred a nice Q&A session but tough to do anything in 5 minutes. Instead a lot of lawyers who have no idea about economics seem to have spent a lot of time talking partisan issues.

Anyhow, within the conversations were some blanket "non answers" by Bernanke, which open the potential up for QE3. My working assumption right now is after QE2 ends in June, there will be a break for at least a while. But last time that happened spring 2010 the stock market promptly plummeted 17% and since Bernanke seems to think manipulating managing the stock market is part of the Fed's role, I could be very wrong on his plans.

With our employment issues being very much structural, and not as much cyclical, and the Fed's favorite measures of inflation muted, Bernanke could be QEing for years more from here under his current guidelines. Slow wage growth among the masses is now seemingly a permanent feature in the U.S. as globalization leads to wage arbitrage so by the formal economic theory, there cannot be widespread inflation if consumers don't have excess money to accept increasing prices. They will just cut back on other expenditures as say food and energy soak up more of their incomes. Current spending levels are being supported by never seen before levels of federal assistance as it is.

[Nov 5, 2010: USA Today - Anti-Poverty Programs Surpass Cost of Medicare]

[May 25, 2010: 1 in 5.5 Dollars of American Income Now Via Government; All time High]

Additionally, recall if the recent payroll tax cut is not extended in 2012, the 2% wage gain every worker just received goes away in 10 months as well - another stress.

Ironically the more QE to come, the more speculators will drive up commodities.... which will impair corporations (who might cut jobs to preserve profit margins) and consumers... which (in the Fed's mind) will require more QE. Circular logic anyone? But in The Bernank's view his actions only make the stock market go up and not other assets (read: commodities) so he won't make the connection.

Via Bloomberg

  • Federal Reserve Chairman Ben S. Bernanke didn’t rule out expanding the central bank’s asset purchases aimed at stimulating the economy, saying he doesn’t want to see the economy relapse into recession.
  • Asked at a House Financial Services Committee hearing today what conditions would warrant a third round of so-called quantitative easing, Bernanke said that “what we’d like to see is a sustainable recovery. We don’t want to see the economy falling back into a double dip or to a stall-out.”
  • Bernanke’s testimony today and yesterday signaled that he will keep the Fed on course to complete $600 billion of Treasury purchases through June under the second round of quantitative easing, a policy criticized by Republican lawmakers as risking an inflation surge. He’s avoided saying what the central bank may do after that. A third round of purchases “has to be a decision” of the Federal Open Market Committee, and “it depends again on our mandate” for stable prices and maximum employment, Bernanke said in response to Texas Representative Jeb Hensarling, the House panel’s vice chairman and a critic of QE2.
  • Responding to a question from Representative Nydia Velazquez, a New York Democrat, Bernanke said the Fed’s policy of keeping its benchmark rate near zero for an “extended period” helps provide support to the economy, “which in our judgment, it still needs.” “The economy’s recovery is not firmly established, and we think monetary policy needs to be supportive,” he said.
  • Since August, when Bernanke signaled the Fed might buy securities to stimulate the economy, “downside risks to the recovery have receded, and the risk of deflation has become negligible,” he said in testimony this week.
  • Inflation is likely to remain low through 2013, Bernanke, 57, a former Princeton University economist, said in Senate testimony yesterday.
  • At the same time, the labor market “has improved only slowly,” and it may take “several years” for the unemployment rate to reach a “more normal level,” he said. “The housing sector remains exceptionally weak,” and “slow wage growth” is keeping labor costs in check, he said.
  • The Fed’s preferred price gauge, which excludes food and fuel, rose 0.8 percent in January from a year earlier, matching December’s year-over-year gain, the lowest in five decades of record-keeping. Fed officials aim for long-run overall inflation of 1.6 percent to 2 percent.

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Source: Bernanke Does Not Rule Out QE3