Bernanke's Congressional Testimony

 Chairman of the Federal Reserve, Ben Bernanke, recited a prepared testimony to Congress on Wednesday July 17, 2013 regarding the economic outlook of the United States. In his remarks, Bernanke highlighted how the Federal Reserve is going to approach the next steps of the current asset purchase program known as, 'quantitative easing'. Quantitative easing was introduced at the peak of the financial crisis in November of 2008, and has been segmented into three separate rounds over the past years. The goal of quantitative easing is to stimulate the economy in a manner that is somewhat unconventional to traditional expansionary monetary policy. The Federal Reserve has come to rely on quantitative easing in the past years, because short-term interest rates have already been lowered to zero percent, and additional monetary policy has been needed to accompany standard expansionary policies to stimulate economic growth. Most recently in the third round of quantitative easing implemented in the United States, the Fed has been spending a consistent eighty five billion dollars a month on mortgage-backed securities and US treasuries in order to breath life into the economy. 

 In his statement to Congress on Wednesday, Bernanke seemed cautiously optimistic that the Fed could possibly begin tapering down its asset purchases so long as projected economic growth would continue in the coming quarters, unemployment rates continue to move down from their current 7.6% to the goal of 6.5%, and inflation moves closer to the goal of 2%. Bernanke made it clear though, that there was not a rigid plan in place and that the Fed would act accordingly to the multitude of varying economic situations it may be  presented with in the near future. "Because our asset purchases depend on economic and financial developments, they are by no means on a preset course".

 

Bernanke and the Fed are under continuously mounting pressure from Congress and the public to come up with a successful economic plan for the future. Quantitative easing has proven to have strong positive effects in stimulating our economy in the past, but is it as simple as just creating another round of QE to solve our problems? Many people feel that Bernanke's spending plans are just smothering the real problems by throwing more and more money at the situation. One thing that is for sure, is that the accuracy of Bernanke's forecasts have very important implications for the future of our economy. Bernanke is most likely set to exit his position as chairman of the Fed this coming January, and would presumably like to achieve this without creating any new major economic issues. For the time being, it is fine that the Fed does not have a rigid plan, it is even a good thing, as the economy can always throw an unexpected curve ball. With this being said, it is important for companies to have a backup plan that does not rely on the Fed being right in their decision making. Even if the Fed does get it right, companies need to account for lag time following decisions made by the Fed, as well as unexpected slumps or accelerations in the economy that may affect sales.

 http://www.forbes.com/sites/billconerly/2013/07/18/ben-bernankes-no-plan-and-your-business-plan/
http://www.businessinsider.com/ben-bernanke-humphrey-hawkins-testimony-2013-7
http://www.usatoday.com/story/money/business/2013/07/17/bernanke-congress-testimony-analysis/2524053/
http://www.opendemocracy.net/openeconomy/ross-heard/qe-timeline-of-quatitative-easing-in-ushttp://beta.fool.com/mohamedassed90/2012/08/08/think-quantitative-easing-good-us-economy-here-are/8949/ 

 

 

Treasury Seeks Advice From Banks On the Decline of TIPS

The Treasury is seeking advice from securities-dealing banks on the decline of Treasury inflation protected securities (TIPS). The 2013 year has been a rough year for TIPS. Recently TIPS mutual fund flows recorded a third quarter loss of 301 million dollars. TIPS overall have been performing very well since the financial crisis. As a result the Treasury has been issuing more TIPS over the years. The Treasury issued 149 billion dollar’s worth of TIPS last year in comparison to 58 billion dollar’s worth of TIPS which were issued in 2009. There is now a concern by the Treasury that they have oversupplied the market with TIPS. The Treasury has asked the banks this month to "comment on the current supply and demand dynamics in the TIPS market including liquidity conditions." The main reason for this is the rise in inflation adjusted interest rates. This has resulted in higher yields which contribute to lower prices and smaller annual returns. The 10 year TIPS yields have surged from negative .66% to .42% since May. Analysts believe that the rises in interest rates are due in part to the improving economy. Since the financial crisis the Fed has opted to go with an easy monetary policy. As a result the Fed has kept interest rates down and used different stages of Quantitative Easing (QE) to help stimulate the economy. The Fed will stop QE in 2014 and will likely opt to go with a tighter monetary policy. This will likely lead to a rise interest rates which can hurt returns on TIPS. Investors are taking notice of this and have pulled 13.1 billion out of TIPS funds since July 10th. Another example of how weak the investor appetite is for TIPS only .4% of the 7 billion 30 year TIPS auction in late June were purchased by direct bidders which is the lowest on record. The Treasury could decide to cut back on TIPS if the demand from investors isn't there, but some argue against this and say that reducing supply would backfire. According to Bob Tzucker "We've seen over time that the more Treasury issues in TIPS, the better the liquidity because more people get involved and trading volumes increase." Others say that investors are just "jittery" right now because of the recent trends in the economy and that TIPS sales will eventually increase when investors are more confident on where the market is heading.

 https://pressroom.vanguard.com/nonindexed/TIPS_inflation_protection_still_has_risks.pdf

 http://online.wsj.com/article/SB10001424127887323664204578608093706355204.html