Ben Bernanke, Interest Rates, and QEII

Under Chairman Ben Bernanke, the Federal Reserve has popularized a form of economic stimulus known as quantitative easing (QE).  The first round of QE expired a while back and now we are in the last phase of QE II.

At one point, in March 2009, Bernanke referred to QE as printing money.  In an interview he said, “this [QE] is more akin to printing money.”  However, Bernanke said in December 2010 that “[QE]…was not printing money.”

Hmmm. We will have more on Bernanke’s confusing and conflicting statements in a moment.

Whether QE is printing money or not, the end of it is in sight.  QE II is scheduled to stop at the end of June.  This report spells out the details [emphasis added]:

…Barring a surprising turn in the economy or inflation, it seems increasingly likely that the securities purchase program, known by some as quantitative easing, is likely to end in June as scheduled.Top Fed officials believe the securities purchase program has been effective and has helped improve the economy’s performance in recent months. Some want to see how the economy performs later in the year without it. The recovery, in this view, might be likened to a child riding a bicycle with training wheels. How will it perform when the added support comes off?

That’s an interesting analogy, comparing a $15 trillion economy to a kid riding a bike with training wheels.  What is left unsaid here is that the Fed is deathly afraid of the deleveraging process that is underway in the private sector.  Real estate prices are falling.  Families and individuals are cutting debt, either by paying it off or going through foreclosure.  The only entity actively taking on more debt is the government.

What’s next for interest rates & inflation?

As we get close to the end of QE II inquiring minds are asking when the Federal Reserve will raise short-term interest rates?  After all, as inflation moves higher, that is what the Fed usually does.

The Wall Street Journal continues:

Trading in the federal-funds futures market, where investors make bets on when the Fed will raise or lower interest rates, suggests they expect the central bank to start raising short-term interest rates in early 2012. The federal-funds rate, an overnight lending rate between banks which the Fed controls, is now close to zero.

Market activity is such that no increase by the Fed seems likely before next year.  If that is the case, then inflation is going to have a long run before any concerted activity begins to slow it down. The Wall Street Journal continues:

In testimony to Congress last week, Fed Chairman Ben Bernanke laid out three criteria that would dictate his decision on tightening monetary policy: He wants to be sure that a sustainable recovery is at hand, that employment is clearly improving and that inflation is moving toward the Fed’s long-term objective of 2%…

I think it is fair to say we are achieving the third of Bernanke’s three criteria. Inflation is well on its way to the 2% mark or beyond.

See What causes higher prices & inflation.

Jon Stewart & the Bernanke Tapes

This clip from the Daily Show has both of the Bernanke interviews in which he first says QE is printing money and, in a later interview, says it is not:

Source: The Daily Show

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A word of advice for you,Kurt, if I may.

Don’t bother trying to make any sense out of what Bernanke either says, or does; and, always try to remember what Taleb said about economists in “The Black Swan” and “Fooled by Randomness”.

Kurt Brouwer is a fee-only financial advisor with three decades of experience.  He is the chairman and co-founder of Brouwer & Janachowski, LLC.  Kurt has written books, articles and hundreds of blog posts on mutual funds, ETFs and other investment topics.  E-mail: kurt.brouwer *at* gmail.com.

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