CAMBRIDGE – At the United States Federal Reserve’s recent and first-ever public press conference, Chairman Ben Bernanke gave a spirited defense of the Fed’s much-criticized policy of mass purchases of US government bonds, also known as “quantitative easing.” But was his justification persuasive?
Most economists viewed his performance as masterful. But the fact that the dollar has continued to slide while gold prices have continued to rise suggests considerable skepticism from markets. One of the hardest things in central banking is that investors often hear a very different message from that which the central bank intends to send.
The Fed, of course, has been forced to turn to “QE,” as traders call it, because its normal tool for fine-tuning inflation and growth, the overnight interest rate, is already zero. Yet US economic growth remains sluggish, and is accompanied by stubbornly high unemployment. QE has been blamed for everything from asset-price bubbles to food riots to impetigo. Everyone from foreign finance ministers to cartoon satirists (check out the video “quantitative easing explained”) to Sarah Palin has ripped into the policy.
Critics insist that QE is the beginning of the end of the global financial system, if not of civilization itself. Their most telling complaint is that too little is known about how quantitative easing works, and that the Fed is therefore taking undue risks with the global financial system to achieve a modest juicing of the US economy.