Ben Bernanke on QE 3.0: Not Now, But An Open Option

Signaling channel is an esoteric tool used by central bankers to project future stance of monetary policy. The objective is to influence market expectations by transmitting the possible courses of actions that the central banks may undertake.

This exactly defines the current actions of US Federal Reserve chairman Ben Bernanke on the contingent option to exercise QE 3.0.

The other day Mr. Bernanke floated a trial balloon, today he demurs.

From Bloomberg, (bold emphasis mine)

Federal Reserve Chairman Ben S. Bernanke told Congress that the central bank isn’t currently ready to embark on a third round of government bond-buying to stimulate the economy.

“We’re not prepared at this point to take further action,” Bernanke said today, in response to a question from Senate Banking Committee Chairman Tim Johnson, a Democrat from South Dakota. Johnson asked Bernanke why the Fed wasn’t immediately starting a new stimulus program given the weak economic recovery and rising unemployment...

In House testimony yesterday, Bernanke said the Fed still has tools to spur growth, and that “we have to keep all the options on the table,” driving share prices higher. Bernanke told Senators today that policy makers want to see if the economy rebounds as anticipated in the coming months, and that they are keeping a close eye on inflation.

Should the economy turn out to be weaker than expected, the central bank may provide more monetary stimulus, Bernanke said. A third round of quantitative easing, or QE3, is an option if a recent economic slowdown persists and deflationary forces re- emerge, he said.

As part of policy communications, I don’t think that this had been meant to only test the market. I think this serves part of the mind conditioning where QE 3.0 will be used eventually. By laying down the QE option, the unstated purpose is to imprint the notion of access.

Yet it’s not a question of IF but a WHEN.

Economic slowdown or deflation has merely been used as justification. I see this ‘slowdown-deflation’ pretext as tied either to the US congressional vote on the debt ceiling (see earlier explanation here) or to the evolving political and market conditions in the Eurozone (see here).

Anytime a perceived risk to the banking system surfaces, whether in Europe or the US or in Asia, the QE option for central banks, has been the recently adapted standard.

Understand this.