By Caroline Baum
When bond traders, known to be creatures of habit, saw the Aug. 26 calendar entry for Ben Bernanke's opening remarks at the Kansas City Fed's annual Jackson Hole Conference, they figured QE3 was a done deal.
After all, it was one year ago in opening remarks at the same conference that the same Fed chief teed up the possibility of additional securities purchases, known as quantitative easing. If the Fed were to initiate a new round of bond purchases, tradition argued for dropping a hint from the Grand Tetons later this month, not in the statement released at the conclusion of today's policy meeting.
It took from late August 2010 until early November for the Fed to commit to QE2, with the announcement of the purchase of $600 billion of intermediate and long-term Treasuries over the next seven months.
Once the program was underway, Bernanke redefined the effort. There is no "Q" in QE2, he said in a Nov. 19 speech:
"Incidentally, in my view, the use of the term `quantitative easing' to refer to the Federal Reserve's policies is inappropriate. Quantitative easing typically refers to policies that seek to have effects by changing the quantity of bank reserves, a channel which seems relatively weak, at least in the U.S. context. In contrast, securities purchases work by affecting the yields on the acquired securities and, via substitution effects in investors' portfolios, on a wider range of assets."
The Fed's goal, in other words, is to lower Treasury yields and force investors out the "risk curve," reducing rates on other debt instruments and boosting stock prices. Pumping banks full of cash to lend isn't the means to the end, according to Bernanke (monetarists take note).
Taking Bernanke at his word, why would policy makers want to venture into the messy politics of QE3 when the weak U.S. economy and market turmoil are taking care of interest rates for the central bank? The yield on the 10-year Treasury note stood at 3.16 percent on June 30, when QE2 ended. Today the newly downgraded AA+ benchmark yields 2.36 percent.
Surely Fed officials understand that falling long rates in the face of a steady short rate -- a flattening yield curve -- isn't expansionary. Just ask Japan. If this is how the Fed expects monetary policy to work, maybe they should outsource it.
(Caroline Baum is a Bloomberg View columnist.)-0- Aug/09/2011 14:30 GMT