Update: Ben Bernanke directly addressed critics of QE3 in a speech Monday afternoon before the Economic Club of Indiana in Indianapolis. Among the highlights:
- "The Federal Reserve's price stability record is excellent, and we are fully committed to maintaining it."
- "I'm confident that we have the necessary tools to withdraw policy accommodation when needed, and that we can do so in a way that allows us to shrink our balance sheet in a deliberate and orderly way."
- "The best and most comprehensive solution" to concerns about how QE affects savers "is to find ways to a stronger economy. Only a strong economy can create higher asset values and sustainably good returns for savers."
- "I sometimes hear the complaint that the Federal Reserve is enabling bad fiscal policy by keeping interest rates very low and thereby making it cheaper for the federal government to borrow. I find this argument unpersuasive. The responsibility for fiscal policy lies squarely with the Administration and the Congress."
Earlier: This is a big week for economic data, culminating with Friday's jobs report, and a huge week for U.S. politics, highlighted by Wednesday's Presidential debate.
These issues will dominate headlines but it's also a very big week for central bankers. Along with the European Central Bank, the central banks of England, Japan and Australia host scheduled meetings, while Ben Bernanke is giving a speech Monday and the minutes of the Fed's September meeting are due on Thursday.
It was at the September meeting when the Fed announced plans to buy up to $40 billion of mortgage-backed securities per month until the employment situation improves "substantially."
The 'QE Infinity' announcement exposed Bernanke's Fed to a lot of criticism and second-guessing at home, which is to be expected. But it's also sparked a tremendous backlash abroad, as emerging economies fear the Fed's ultra-aggressive policies will spur inflation in commodity prices.
"The rise in global liquidity could lead to rapid capital inflows into emerging markets…and push up global raw-material prices," Bank of Korea Governor Kim Choong-soo said last week.
Brazil's finance minister Guido Mantega was more blunt, repeating a charge the Fed is engaging in a "currency war" and warned QE3 will "only have a marginal benefit...as there is already no lack of liquidity."
Mantega — and other QE3 critics — have a point about the limits of monetary policy in its ability to give the "real economy" a boost, although Monday's ISM manufacturing report was the best in four months. (On the other hand, Bernanke has a point that emerging economies can limit the impact of "hot money" inflows spurred by Fed policies by letting their currencies rise in value -- although that crimps export growth which is a huge concern for Brazil, especially.)
As for the threat of Fed policies spurring inflation, commodity prices have risen since June 6, when the central bank hinted more QE was coming. But the Dow Jones-UBS Commodities Index is down 1% since the actual announcement on Sept. 13, The WSJ reports.
Maybe it's a case of "buy the rumor sell the news" but most commodities remain below their annual highs, reached in the first quarter, with the notable exception of gold.
At some point, the inflation hawks might be right and Bernanke's policies will come back to haunt him, crush the dollar and destroy American living standards. But, so far, such warnings haven't come to fruition because, at the end of the day, the fundamentals of a weak global economy are offsetting Bernanke's best efforts to spur inflation.
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