Comments in the FT Alphaville provide a useful summary.
Credit Easing versus Quantitative Easing
The Federal Reserve’s approach to supporting credit markets is conceptually distinct from quantitative easing (QE), the policy approach used by the Bank of Japan from 2001 to 2006. Our approach–which could be described as “credit easing”–resembles quantitative easing in one respect: It involves an expansion of the central bank’s balance sheet. However, in a pure QE regime, the focus of policy is the quantity of bank reserves, which are liabilities of the central bank; the composition of loans and securities on the asset side of the central bank’s balance sheet is incidental. Indeed, although the Bank of Japan’s policy approach during the QE period was quite multifaceted, the overall stance of its policy was gauged primarily in terms of its target for bank reserves. In contrast, the Federal Reserve’s credit easing approach focuses on the mix of loans and securities that it holds and on how this composition of assets affects credit conditions for households and businesses. This difference does not reflect any doctrinal disagreement with the Japanese approach, but rather the differences in financial and economic conditions between the two episodes. In particular, credit spreads are much wider and credit markets more dysfunctional in the United States today than was the case during the Japanese experiment with quantitative easing. To stimulate aggregate demand in the current environment, the Federal Reserve must focus its policies on reducing those spreads and improving the functioning of private credit markets more generally.
The Chairman does a good job of providing a summary of the Fed objectives and should make anyone who reads this feel more comfortable that the Fed is on the right track. Bernanke talks about the toolkit available for the Fed and gives a good explanation of how and why certain tools are being used. He actually starts with a discussion on communication as an important tool. He continues to send the clear signal that short rates are going to stay down for some time and this is the key to bringing down long-rates which is the ultimate objective of their policies. Bernanke makes it clear that he understands the communication challenge associated with running these complex policies. He also began talking about the exit strategy which has been an overhand in the market.
This speech which will generally go unread should provide global market confidence that the Fed is following a clear and well-thought path.
The Federal Reserve’s approach to supporting credit markets is conceptually distinct from quantitative easing (QE), the policy approach used by the Bank of Japan from 2001 to 2006. Our approach–which could be described as “credit easing”–resembles quantitative easing in one respect: It involves an expansion of the central bank’s balance sheet. However, in a pure QE regime, the focus of policy is the quantity of bank reserves, which are liabilities of the central bank; the composition of loans and securities on the asset side of the central bank’s balance sheet is incidental. Indeed, although the Bank of Japan’s policy approach during the QE period was quite multifaceted, the overall stance of its policy was gauged primarily in terms of its target for bank reserves. In contrast, the Federal Reserve’s credit easing approach focuses on the mix of loans and securities that it holds and on how this composition of assets affects credit conditions for households and businesses. This difference does not reflect any doctrinal disagreement with the Japanese approach, but rather the differences in financial and economic conditions between the two episodes. In particular, credit spreads are much wider and credit markets more dysfunctional in the United States today than was the case during the Japanese experiment with quantitative easing. To stimulate aggregate demand in the current environment, the Federal Reserve must focus its policies on reducing those spreads and improving the functioning of private credit markets more generally.
The Chairman does a good job of providing a summary of the Fed objectives and should make anyone who reads this feel more comfortable that the Fed is on the right track. Bernanke talks about the toolkit available for the Fed and gives a good explanation of how and why certain tools are being used. He actually starts with a discussion on communication as an important tool. He continues to send the clear signal that short rates are going to stay down for some time and this is the key to bringing down long-rates which is the ultimate objective of their policies. Bernanke makes it clear that he understands the communication challenge associated with running these complex policies. He also began talking about the exit strategy which has been an overhand in the market.
This speech which will generally go unread should provide global market confidence that the Fed is following a clear and well-thought path.
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