Thursday, October 11, 2012

Forward guidance: Does Bernanke Talk Too Much about How Good his Exit Strategy is?

In an October 1 speech to the Economics Club of Indiana, Chairman Ben Bernanke addressed the risk that the Fed’s latest round of quantitative easing (QE) could lead to inflation. Here is his resolutely reassuring answer, as quoted by Dave Altig on the Atlanta Fed’s Macroblog:
I’m confident that we have the necessary tools to withdraw policy accommodation when needed, and that we can do so in a way that allows us to shrink our balance sheet in a deliberate and orderly way. …
Of course, having effective tools is one thing; using them in a timely way, neither too early nor too late, is another. Determining precisely the right time to ‘take away the punch bowl’ is always a challenge for central bankers, but that is true whether they are using traditional or nontraditional policy tools. I can assure you that my colleagues and I will carefully consider how best to foster both of our mandated objectives, maximum employment and price stability, when the time comes to make these decisions.
I wonder, though, if there is such a thing as being too reassuring. This conclusion, although a bit unconventional, comes from combining two ideas about monetary policy that are increasingly mainstream.>>>Read More

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