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6 Tools Left in Bernanke's Toolbox as QE2 Ends

The verdict from analysts?
  • "It's clear that a couple of reserve members have already said enough is enough," says Robert Johnson, director of economic analysis at Morningstar, who doesn't think we'll see a QE3.
  • "Unlikely," says Blitz. "We've been down this road with QE2... Bernanke already stated that we are in a different position than we were in a year ago, given that unemployment is better and deflation risk is smaller."
  • "Buying different types of securities might capture people's attention because it's bizarre and new," says James Paulsen, chief investment strategist at Wells Capital Management. However, Paulsen says that because there is so much liquidity already, pumping in more is akin to dumping a bucket of water into the sea.
  • 3. Give guidance on the Fed's balance sheet

    The Fed could be more transparent in its plans for structuring the $3 trillion-worth of securities currently on its balance sheet. That might mean more clarity in the breakdown of long verses short term securities. This is similar to tool #2 in which the Fed would formally announce which securities it plans to buy.

    4. Set an inflation target

    Targeting a low inflation rate should help anchor expectation. Americans might feel more confident about spending and businesses might feel more willing to invest. However, the Fed might hit a roadblock in determining which measure of inflation to target. Energy and food inflation hit consumers the hardest but some of the inflation comes from factors abroad rather than domestic.

    The analysts were overwhelming negative on this one. Bernanke's answer in his last speech was lukewarm (it's "worth considering").
  • "We can't be that accurate in setting inflation," says Paulsen.
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