Marius Daheim - Is Bernanke out of ammunition

26 Aug 2011 Bloomberg
Marius Daheim is senior fixed-income strategist at Bayerische Landesbank.

[Is Bernanke out of ammunition?]
He is running out that's for sure. Yields are at record lows, even mortgage rates are at record lows. The yield curve is relatively flat. So would you want to do more quantitative easing and risk flattening the curve further reducing the incentive for banks to make loans to profit from the term structure of interest rates? Probably not. On the other hand reducing rates / more QE could prop up the equity markets but would that effect last?
Bernanke said he might buy up foreign government bonds [!] which would effectively be an effort to weaken the dollar and would effectively be a beggar thy neighbour policy. So it is a very delicate issue. It would have repercussions on external policy. And the Eurozone is also in a debt crisis.

[You're not giving us much hope at all here! What about just buying the long end of the yield curve?]

Well it would flatten the yield curve, and lower rates are positive, but the Fed has done all it can do. Now it's up to the policy makers in Washington to address the structural issues.
In any case we are not in a deflationary setting right at the moment but if growth were to really fall back and risks of a double dip were to increase then we may see inflation (headline and core) receding again. That would open the case again for Treasury bond purchases. But Bernanke will signal he is not prepared to use those tools at the moment.

2 year US Note: 0.20%
5 year US Note: 0.98%
10 year US Note: 2.24%

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