Wednesday, July 13, 2011

No Surprises Here - Let's Hope Bernanke Has Learned His Lesson

Stocks, commodities and long term bond yields all rose in response to Bernanke's testimony today. Expected fed funds rates fell, which suggests any more stimulus is more about postponing tightening than anything else.

If the Fed does need to engage in additional asset purchases (and I think it's extremely likely it will) it should use more flexible policies than it did in QE2. Instead of announcing in advance it will purchase $X in bonds over a certain time period, the Fed should purchase or sell (if the economy improves rapidly) as many bonds as it needs on a month to month basis in response to changing economic circumstances. This would allow them to seamlessly transition between tightening and easing as if they were controlling the fed funds rate.

Better late than never...

Friday, July 8, 2011

"The trade-offs (between growth and inflation) are getting less attractive at this point."

That was Bernanke during his April 27th press conference. What's happened since then?

Even if Bernanke was correct then, it seems clear that the trade-offs are once again incredibly attractive.