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Forex Flash: Bernanke feels QE benefits outweigh the costs - Nomura

Nomura economist Lewis Alexander notes that yesterday, Fed Chairman Bernanke made his semi-annual testimony on monetary policy to the Senate Banking Committee and his comments made clear that he stands with the FOMC participants who anticipate that longer run asset purchases will continue beyond mid 2013.

Alexander notes that from the written notes, Bernanke dedicates several pages to the "costs" associated with QE, but on the three critical issues -- generating inflation expectations, systemic risk, and fiscal impact -- the Chairman made clear that these are not reasons to pull back on the FOMC's longer-term asset purchase program now. He feels that it is also worth noting that the issue of whether or not the Fed's LSAPs are adversely affecting the functioning of markets was relegated to a footnote in the prepared testimony ("The Federal Reserve is also monitoring financial markets to ensure that asset purchases do not impair their functioning").

Further, however he notes that a significant minority of FOMC participants have expressed concerns that the efficacy of the QE program may not outweigh the costs - something that was reflected in the minutes of the last two FOMC meetings. He writes, “The last time FOMC members formally offered their outlook was at the meeting in mid-December. The discussion of those forecasts that was detailed in the minutes of that meeting noted that participants “were approximately evenly divided” between those who expected the current asset program to end by mid year and those who thought the asset purchases would continue beyond that point.”

The Report on Monetary policy that accompanied Bernanke´s testimony yesterday stated that FOMC participants outlook for the economy changed little between the meeting in December and January. Furthermore, he adds that yesterday‟s report reproduced verbatim the discussion of participants‟ forecasts and policy outlook from the minutes of the December meeting.

Finally, he notes that following the prepared testimony, the Chairman was questioned on the criteria for ending QE. In response, Bernanke said the Committee is continuously reassessing the efficacy and costs of its asset purchase program and "we are doing our best to communicate the criteria for action". Beyond that, Alexander comments that Bernanke noted that the FOMC has been unable to agree on a specific quantitative threshold for altering QE that encapsulates labor market conditions in the context of cost vs benefits.

He writes, “The Committee‟s significant focus on the costs and benefits of its asset purchases suggests there may be an increasing possibility that the FOMC will include more detailed guidance on how the Committee is assessing the costs and benefits of its current LSAP program in the formal FOMC policy statement.” Alexander feels that it is possible that this change could come as early as the next meeting on 19-20 March. Nonetheless, he finishes by commenting that the Chairman’s statements yesterday, and recent statements by other FOMC participants, do NOT suggest that the Committee is close to a consensus on how, or under what circumstances, to wind down its current asset purchases.

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