US Fed chief Ben Bernanke has gone out of the way to explain how monetary policy works once the traditional policy tool, the overnight inter-bank rate, hits zero. When the Fed buys long-term Treasuries, it depresses yields and forces investors to buy assets that carry more credit risk, such as stocks and corporate bonds.
Lower yields make housing more affordable. Higher stock prices work through the wealth effect to increase consumer spending leading to higher corporate profits and personal incomes in what he called a ‘virtuous circle’(extract from a Bloomberg article, ‘The Question the Fed Should be asking’.)
‘Phew’ might well be the reaction of a non-economist, not to speak of the layman. What a roundabout way. And what’s the certainty that it will lead to results? None.
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