Just in case the future of quantitative easing did not seem uncertain enough after Federal Reserve Chairman Ben Bernanke stated at a press conference that the existing regimen of bond buying could start being reduced this year, another prominent official at the central bank has indicated that these asset purchases could potentially be increased in the event that inflation is too low.
The future of QE is important to anyone taking part in investment, as this program of bond purchases has been credited with creating inflated prices in asset markets worldwide.
Bernanke made his statements following the conclusion of the most recent Federal Open Market Committee meeting, indicating that the current regiment of bond purchases, which involves the acquisition of $85 billion worth of debt-based assets every month, could be lowered this year, depending on the strength of key economic indicators such as the jobless rate.
Markets have already been rocked by these statements, as many different assets experienced sharp sell-offs after Bernanke spoke with members of the media, according to MarketWatch. Joe Heider, principal at Westlake, Ohio-based Rehmann Financial, told the news source that market participants wanted the Fed chief to assure them that bond purchases would continue.
"The market was looking for some kind of commitment of no tapering, and he (Bernanke) is saying the labor market is improving," Heider told the news source. "Markets love certainty; they don't like uncertainty."
The market expert emphasized the degree of uncertainty that surrounds bond purchases and the variables that are affecting these actions, saying that markets are uncomfortable with not knowing when interest rates will change and when bond purchases will decline.
Bullard says bond purchases may increase
Just in case the markets did not have enough ambiguity to deal with, Federal Reserve Bank of St. Louis President James Bullard told Bloomberg in a telephone interview that if inflation falls below the target annual rate of 2 percent set by the central bank, the current monthly volume of asset purchases may need to increase.
Bullard noted that while Bernanke placed substantial emphasis on the health of the labor market as a key determinant of any future changes to QE, the president of the St. Louis Fed stated that for now, inflation is a more pressing issue, according to the news source.
The Federal Reserve official has stated that the central bank has set an inflation target, and must work hard to stay close to that rate, the media outlet reports. In addition to emphasizing the need for consistent increases in the price level, he has cautioned of the potential negative consequences of deflation since 2010.
Market desire for certainty
It is important to note that while Bernanke did state that reducing asset purchases this year was a possibility, he said that the central bank might also boost the regimen of bond buying, and that inflation was one of the key variables that would impact any such decisions, MarketWatch reports.
While the chance that QE could be accelerated may seem promising to some, Randy Frederick, director of active trading and derivatives at Charles Schwab, emphasized that the asset markets are more interested in stability, according to the news source.
"The market is trying to position itself for a less-active Fed, and maybe a more normalized interest-rate environment," he stated in reference to the volatile nature that asset markets have displayed since Bernanke told Congress that a strong enough economy could coincide with lower asset purchases.
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