Bernanke in Testimony Can Show Paul How QE2 Works

nice way to bring it all home - that is how you debate! Bernanke in Testimony Can Show (Ron) Paul How QE2 Works (abbrv.) The next time Federal Reserve Chairman Ben S. Bernanke appears before Congress, here are a few visual aids he can use to show critics that quantitative easing is working: The Standard & Poor’s 500 Index of stocks has climbed 18 percent since he said Aug. 27 that additional asset purchases might be warranted. The risk premium on high-yield, high-risk bonds has narrowed to 5.16 percentage points from 6.81 percentage points, Bank of America Merrill Lynch index data show. Inflation expectations have jumped by 44.4 percent. The unemployment rate has fallen to its lowest level in almost two years. So much for 2008 Republican vice-presidential candidate Sarah Palin’s assertion that the “dangerous experiment” wouldn’t “magically fix economic problems.” Quantitative easing “was a key factor in taking deflation risk off the table,” said Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York. “It certainly helped bolster longer-term inflation expectations, and it was a factor that contributed to the rally in the stock market. Overall, I give it a good grade.” Preferred Gauge The Fed’s preferred inflation gauge, which excludes food and fuel, rose 0.8 percent in January from a year earlier, matching December’s gain, the lowest in five decades of record- keeping. Fed officials aim for long-run overall inflation of 1.6 percent to 2 percent. As financial markets rebound, economists are forecasting growth this year at 3 percent, according to the median response of 65 analysts surveyed by Bloomberg News from March 4 to March 10. In an October survey, the median forecast was 2.4 percent. Tone Down The improvement in the economy hasn’t prompted Fed critics like Representative Ron Paul to tone down their disapproval. “The real cause of price inflation, which is a deadly threat to us right now, is the Federal Reserve System and our monetary policy,” Paul, a Texas Republican who wrote the book “End the Fed,” said at the hearing. While inflation expectations have risen, they don’t show that investors are worried about skyrocketing prices. The break- even rate for 10-year Treasury Inflation Protected Securities, the yield difference between this debt and comparable maturity Treasuries, rose to 2.57 percentage points on March 8, the highest since July 2008 and up from 1.63 percentage points on Aug. 27. The rate is a measure of the outlook for consumer prices during the life of the securities. Price Stability Fed policy makers, whose goals are price stability and full employment, said they voted for QE2 partly because of concerns that prices would fall. New York Fed President William Dudley, who is also vice chairman of the Federal Open Market Committee, said Feb. 28 that the “considerably brighter” outlook isn’t yet reason to withdraw the stimulus. Yields on 10-year Treasury notes remain below their average of 5.23 percent during the last decade, according to data compiled by Bloomberg. The benchmark security yielded 3.17 percent yesterday, up from 2.64 percent on Aug. 27. Even so, QE2 is “working pretty good” at achieving the Fed’s goals of higher inflation and faster growth, said Keith Hembre, chief economist at Nuveen Asset Management in Minneapolis. “You look backward and that’s essentially what it’s done.” The FOMC affirmed plans to continue the program through June at its March 15 meeting, noting that “the economic recovery is on a firmer footing.” The unemployment rate fell to 8.9 percent in February, the lowest since April 2009. The decline ended the longest period of joblessness at 9 percent or higher since monthly records began in 1948. Record Junk-Bond Sales The availability of capital to the lowest-rated companies also has increased since the start of QE2. Sales of high-yield, or junk, bonds have reached $72.9 billion this year, the most on record for the first quarter, according to data compiled by Bloomberg. Fed Tools Dudley reiterated his view last week that the Fed has the tools, such as raising the interest rate it pays on bank reserves, to tighten credit when needed, and that QE2 has helped the economy by boosting stocks and bonds. “People worry that these purchases will ultimately be inflationary, and I don’t think they have anything to worry about,” he said. “We are absolutely determined to prevent any long-term inflation problem.”