The media are doing their best to create interest in who will be Bernanke’s replacement: Lawrence Summers or Janet Yellen.
Summers is a dove. Yellen is a dove. Summers has made a few statements saying that QE has limits. But no one expects the policy to go on forever. Yellen has voted with Bernanke every time.
The media say that Wall Street prefers Yellen. Obama prefers Summers. But Obama has not said.
The Summers vs. Yellen stories keep the readers reading. But as to how the Federal Reserve will stop the policy without crashing the stock market and the bond market at the same time, no one is saying.
As to how the FED will adhere to such a policy once the two markets tank, no one is saying.
As to how the exit policy — sales of Treasury bonds and Fannie/Freddie bonds — can be accomplished without causing another massive recession, no one is saying.
When was the last time Bernanke affirmed the existence of such an exit strategy? I can find no reference for two years. Here is what he told Congress on July 17.
We are using asset purchases and the resulting expansion of the Federal Reserve’s balance sheet primarily to increase the near-term momentum of the economy, with the specific goal of achieving a substantial improvement in the outlook for the labor market in a context of price stability. We have made some progress toward this goal, and, with inflation subdued, we intend to continue our purchases until a substantial improvement in the labor market outlook has been realized. In addition, even after purchases end, the Federal Reserve will be holding its stock of Treasury and agency securities off the market and reinvesting the proceeds from maturing securities, which will continue to put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
In short: no exit. Ever.
The media have re-defined “exit.” Any reference to an exit these days means merely a reduction of the rate of increase in the present rate of $85 billion a month.
The FED is buying over $500 billion of the Treasury’s estimated annual deficit of $650 billion. It is buying almost $500 billion in Fannie-Freddie bonds. What happens to interest rates if the FED stops buying? What happens to Wall Street? What happens to the housing recovery?
No one asks Yellen what she thinks would happen. No one asks Summers. It would be nice to know what they think. Buy knowing what they think is of no interest to the financial media.
It will be interesting to see what Senate members ask the nominee. It seems like a reasonable question.