At this time, Ben Bernanke is going to go down as the Fed chairman that saved the world from the next great depression. He has expanded the Federal Reserve’s balance sheet to over $4 trillion. He is the architect of QE-1, QE-2, operation twist, and the current $85 billion a month QE-3 programs. His easy money policies have helped to inflate the major stock market indexes to new all time highs. He has even vowed that the central bank will help improve the U.S. labor market. Whether you agree with Chairman Bernanke’s economic policies or not he has inflated all of the global stock markets since 2009 without many negative repercussions.
Now, it is important to remember that Chairman Bernanke has kept the fed funds rate (overnight lending rate to the large banks) at zero to a quarter percent since December 2008. This is one of the reasons why a bank will pay you very little interest in a savings account. The economic policies by the Federal Reserve have also forced many savers into equities and higher risk investments over the past few years.
So will Chairman Bernanke start to taper his current $85 billion a month QE-3 program tomorrow? That is the question that almost every investor in the world is asking at this time. Since 2009, every time the stock market has started to fall or go into correction mode, the Federal Reserve has announced another easy money program to boost asset prices. In late 2010, the major stock indexes looked vulnerable to falling and Chairman Bernanke implemented QE-2. This was a program where the central bank purchased $600 billion in U.S. Treasuries. The theory behind this program was to lower interest rates and help stabilize the housing and credit markets. In late 2011, the Federal Reserve boss announced operation twist. This program was also designed to lower interest rates even further by selling medium term bonds and using the proceeds to buy longer term bonds such as 10-year Treasuries. You see, mortgage rates are mostly tied to the yield on the 10-year U.S. Treasury Note.
In September 2012, Ben Bernanke and his Federal Reserve bank announced QE-3. In this program, the central bank buys $85 billion a month worth of U.S. Treasuries and mortgage backed securities. Since May 2013, the Federal Reserve has been hinting that they are going to begin tapering its QE-3 program. When Ben Bernanke told this to Congress the stock market plunged lower. Immediately, numerous central bank members came out and recanted what Chairman Bernanke had told the U.S. Congress. This is a sign that someone is very afraid to see stocks decline. It was just a few weeks later that Chairman Bernanke said that rates will remain very low for a long period of time. You would think these guys would just speak plain English and not some sort of Greenspan code, but instead they carefully pick each word and leave their statement open for debate. The bottom line, Chairman Bernanke has been afraid since 2009 to see if the U.S. economy can stand on its own two feet. While most economists believe a small tapering is going to start tomorrow, I’ll believe it when I see it. Chairman Bernanke will make his announcement tomorrow afternoon.