What's Ben Bernanke's next move, now that the Fed has extended Operation Twist through the end of the year?
Does Mr. Bernanke even have a next move? After all, Bill Gross just warned about taking risks in the markets, as the "monetary bag of tricks empties."
On the flip side, economist Paul Krugman called the Fed's action on Wednesday "shameful …for not going all out with monetary stimulus."
Mr. Bernanke said this week that the Fed had taken the duration-extending Operation Twist program about as far as it could. The central bank could begin a third round of quantitative easy, but that bond-buying program faces many critics who say it hasn't worked. Likewise, it's doubtful that simply extending the Fed's guidance on “exceptionally low” interest rates from the end of 2014 to the end of 2015 may have much impact.
But as Mr. Bernanke himself has said, the Fed's toolbox is far from empty. And he may well be reaching into that toolbox in the months ahead.
“We're prepared to do more,” Mr. Bernanke said this week, depending on the state of the economy and European developments.
What the Fed could do at this point was laid out in Mr. Bernanke's now-famous
speech from 2002, from which he earned the nickname "Helicopter Ben."
Mr. Bernanke's outline for how to battle deflation and lack of aggregate demand-- when rates are already at zero--is worth following, said Curtis Arledge, chief executive officer of BNY Mellon Investment Management, at a conference earlier this month.
That's because the Fed has pretty much followed the script Mr. Bernanke outlined a decade ago, Mr. Arledge said.
And judging by that speech, we're only about halfway through the Fed's options.
One-as-yet untried option that Mr. Bernanke said he preferred over the jawboning about keeping short-term rates low was setting explicit ceilings for yields on longer-maturity Treasury debt. Rate caps would have a spillover effect on other credits. This is a policy the Fed actually used in the post-WW II period.
A broad-based tax cut accommodated by a program of open-market purchases to alleviate any interest-rate increase would be another effective stimulant, he said.
The Fed could also "expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys," Mr. Bernanke said in 2002. The Treasury could issue debt to purchase private assets; then the Fed would purchase an equal amount of Treasury debt.
This asset-buying option would essentially let the Fed "buy real assets--in effect buy houses or other real assets that are deflating," Mr. Arledge said.
Referencing Japan in his speech, Mr. Bernanke said political constraints, rather than a lack of policy instruments, explain why Japanese deflation had persisted.
Under a fiat, or paper money system, a government and its central bank "should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero," Mr. Bernanke said.
