Volcker, Bernanke and Investors on QE and Bond buying

Paul Volcker, former chairman of the Federal Reserve, said the U.S. central bank’s latest bond-buying program isn’t creating inflationary pressure. This comes as Ben Bernanke defended the Federal Reserve's unprecedented bond buying.

 

Economeka

My assumption about Ben Bernanke and the Federal Reserve is they will keep interest rates at zero until upward inflationary pressures surface. Given that unemployment numbers are still going up this places pressure on the Federal Reserve to keep those numbers down.

From Ben Bernanke’s speech we can deduce that he expects the public and private sector to do what they can to get unemployment down. By keeping interest rates near 0% this provides an incentive for the private sector to borrow finance at an affordable rate and create employment.

The U.S. jobless rate rose to 8.2 percent last month from 8.1 percent in August, according to the median forecast of 79 economists surveyed by Bloomberg News before the Labor Department report Oct. 5. Payrolls increased by 115,000 in September, less than the 139,000 average over the first eight months of the year, according to a separate survey.

The Fed said Sept. 13 that it will buy $40 billion of mortgage bonds a month until the U.S. sees what Chairman Ben S. Bernanke described as an “ongoing, sustained improvement in the labor market.” The central bank also said it will probably hold the federal funds rate near zero at least through mid-2015

Now according to Milton Friedman, there exists a natural rate of unemployment and Inflation is always and everywhere a monetary phenomenon. Paul Volcker’s assurance that this Bond buying strategy coupled with a low federal funds rate will not increase inflation goes a long way to support the Federal Reserve. Investors doubt that the Federal Reserve’s announcement of additional quantitative easing will get Americans to spend more.

U.S. gross domestic product expanded at a 1.3 percent annual rate in the second quarter, less than the previous estimate of 1.7 percent and below the first quarter’s 2 percent pace, says data from the Commerce Department show.

Now that a third wave of easing has become reality, continued lackluster job growth and the looming fiscal cliff may temper investor sentiment, according to Cook, who helps oversee more than $480 million in assets.

Employers added 87,400 jobs a month on average in April through August, compared with 211,400 in the preceding five- month period; and the jobless rate, at 8.1 percent in August, has been stuck above 8 percent since February 2009, Labor Department data show. Meanwhile, the U.S. faces higher taxes and reductions in spending on government programs that will take effect at year-end unless Congress acts.