Bernanke in testimony can show how QE2 works in free markets

The next time Federal Reserve Chairman Ben S Bernanke appears before Congress, here are a few visual aids he can use to show critics that quantitative easing is working:

The Standard & Poor’s 500 Index of stocks has climbed 18 per cent since he said August 27 that additional asset purchases might be warranted.

The risk premium on high-yield, high-risk bonds has narrowed to 5.16 percentage points from 6.81 percentage points, Bank of America Merrill Lynch index data show.

Inflation expectations have jumped by 44.4 per cent.

The unemployment rate has fallen to its lowest level in almost two years.

So much for 2008 Republican vice-presidential candidate Sarah Palin’s assertion that the “dangerous experiment” wouldn’t “magically fix economic problems”.

Quantitative easing “was a key factor in taking deflation risk off the table,” said Peter Hooper, chief economist at Deutsche Bank Securities in New York. “It certainly helped bolster longer-term inflation expectations, and it was a factor that contributed to the rally in the stock market. Overall, I give it a good grade.”

The Fed’s November 3 decision to buy $600 billion of Treasury securities through June was dubbed QE2 by analysts and investors because it followed $1.7 trillion of asset purchases that ended in March 2010. The plan sparked the harshest political backlash against the central bank in three decades, with Republican lawmakers warning the additional stimulus risked causing a surge in prices. So far, they were wrong.

The Fed’s preferred inflation gauge, which excludes food and fuel, rose 0.8 per cent in January from a year earlier, matching December’s gain, the lowest in five decades of record-keeping.