- In August 2007, Fed Funds was 5.25%
- By December 2008, we had ZIRP
- FOMC turned to nontraditional policy approaches to support the recovery
- The Fed has been in the process of learning by doing. In other words, trial and error.
- Bernanke gives justification, citing academic work, of the Fed's focus on enacting monetary policy through the portfolio balance channel. This basically covers large-scale asset purchases.
- Explicitly says that this type of policy "...can signal that the central bank intends to pursue a persistently more accommodative policy stance..."
- A sturdy conducted by the Fed using the Board's FRB/US model of the economy, as of 2012, the first two rounds of LSAPs (Large-Scale Asset Purchases) "...may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred."
- Is this an indirect shot at the fiscal policy makers? In other words, the only reason the economy is hanging on is because of monetary policy.
- Pg 12 - "...appears reasonable to conclude that nontraditional policy tools have been and can continue to be effective in providing financial accommodation..." The potential ground work to allow more non-traditional policies.
- Potential costs of LSAPs:
- Impair the functioning of securities markets.
- Trading among private agents could dry up, degrading liquidity and price discovery.
- Lead to higher liquidity premiums on Treasury securities.
- Reduce public confidence in the Fed's ability to exit smoothly at the appropriate time.
- Lead to rather aggressive unanchoring of inflation expectations.
- Financial stability
- Driving down yields could lead to stretching on the risk spectrum for yield.
- Fed would incur financial losses
- A loss may add to the federal deficit and debt.
- FOMC has spend considerable effort planning and testing an exit strategy. They believe they will act decisively at the appropriate time.
- Pg 14 - "We have seen little evidence thus far of unsafe buildups of risk or leverage..."
- "...the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant."
- In the last line of Bernanke's speech he basically says he will conduct additional policy accommodations (ie: whatever non-traditional methods it takes) to strengthen the economy and improve the labor market....within the context of price stability. Of course earlier on in his speech he did cover himself by saying inflation isn't an issue.
http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.pdf