QE II floats only some boats
The Federal Reserve’s first huge injection of liquidity surely helped avoid a horrible depression. The outcome of this second phase is more doubtful. If unemployment is structural, the Fed’s effort might be wasted. Worse, it might be inflating asset bubbles once again. Peter Lee reports.
ONE MONTH AFTER the Federal Reserve Open Market Committee embarked on its latest $600 billion shopping spree in the treasuries market, it appears that the market’s anticipation of quantitative easing (QE) II generated a much stronger response than the actual experience of its implementation.
Ten-year US Treasury note yields narrowed from 3.1% in August, when the Fed began in earnest to signal its intention to expand its balance sheet further, to 2.3% in October. Alongside bond prices, the stock market also shot up, with the S&P 500 rising from 1,040 to over 1,220.
"Financial conditions eased notably in anticipation of the [Open Market] Committee’s announcement [of QE II], suggesting that this policy will be effective in promoting recovery"
Ben Bernanke, Federal Reserve
In a speech to the European central banking conference in Frankfurt on November 19, Ben Bernanke, Federal Reserve chairman, gave himself a hearty pat on the back for all this.