Bernanke has other ways of acting

Posted by Izabella Kaminska on Jun 23 09:32. 5 comments | Share

All this debate about whether or not we will see another round of quantitative easing in the US, and yet, in his latest comments, Ben Bernanke has hinted more strongly than ever that if the Fed does act it might do so in a very different manner. More…

All this debate about whether or not we will see another round of quantitative easing in the US, and yet, in his latest comments, Ben Bernanke has hinted more strongly than ever that if the Fed does act it might do so in a very different manner. There are, in a sense, many different forms of QEasing.

Indeed, as Bernanke commented in his Wednesday FOMC statement:

We do have a number of ways of acting; none of them are without risks or costs. We could, for example, do more securities purchases or – and structure them in different ways. We could cut the interest on excess reserves that we pay to banks. And as was suggested by an earlier question — several earlier questions, actually, John’s  question about giving guidance on the balance sheet or by perhaps even giving a fixed date, you know, to defineextended period, those are ways that we could ease further, if needed. But, of course, all of these things are somewhat untested. They have their own costs. But we’d be prepared to take additional action, obviously, if — if conditions warranted.

For the QE3 enthusiasts, it’s worth pointing out there are obviously natural barriers to more quantitative easing in its current form. The Fed is essentially running out of the securities it can buy — without becoming overly dominant in the US Treasury market.

Which is why it’s interesting that Bernanke should point out that the Fed has flexibility in the way it might structure security purchases in the future.

What comes to mind immediately is some form of derivative structuring, or possibly a literal Bernanke put … a.k.a the promise to buy securities in the future if and only when certain wider market conditions are experienced. Significant risks and costs would indeed be involved in such a measure.

But who knows?

We just wish someone would ask Bernanke about the Fed’s possible use of derivatives the next time around. As a reminder, central banks have used derivatives before and it was suggested in the US.

All we know for now is that Wednesday’s comments have merited further investigation of the possible ways quantitative easing might be “structured” in the future.

Related links:
More on the literal Bernanke put – FT Alphaville
The literal Bernanke put
– FT Alphaville
The Great Vega Short – Artemis Capital

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