Question: How do you make stocks and bonds rise in price at the same time and increase the wealth of the investor class?
Answer: You declare your intent to buy $85 billion of and mortgages every month for a considerably extended period as a way to maintain the lowest rates of interest in recent history.
Question: How do you drive the price of stocks and bonds lower at the same time, reducing the wealth of the investor class, and threatening the housing recovery?
Answer: You announce your intention to introduce tapering and reduce the amount of bonds and mortgages you are buying every month, with the intent of ultimately ceasing such purchases completely at some uncertain date in the future.
Question: How do you correct(reverse) the intent to begin phasing out quantitative easing in the light of stock and bond markets reacting in an overly negative manner that threatens the economic recovery?
Answer: You announce that you may indeed reduce the dollar amount of bonds and mortgages you are buying, but not right away. And you will certainly not be increasing the interest rate for borrowing money in the foreseeable future, or most certainly not until the unemployment rate falls from 7.6% to 6.5%.
Question: What do you do if the latest attempt at manipulation (changing signals) may not be sufficiently convincing. After all, the yield on the 10 year Treasury note is close to its recent peak of 2.70%. The cost of a mortgage has backed up as well.
Answer: You strongly hint that even if the U.S. unemployment rate falls to 6.5%, the Fed may well, probably will, keep interest rates near zero. This is a major revision to what Bernanke has been positing ever since May 22nd, when bond traders began getting net short Treasuries. They meant to coin profits in the instant spike in interest rates.
Hint; this promise might require Bernanke to remain at the helm of the Fed for the near or medium term future, so as to personally steer this, mind you, absolutely fresh, new, dramatic change in policy. It underscores just how dreadfully unpleasant the past few weeks of interest rate hikes have been for Bernanke & Co. The unanticipated negative reaction around the world was not helpful for recovery in either the U.S. or Europe or China.
Question: What can we expect Bernanke to do over the remainder of 2013?
Answer: Divide tapering into two parts, the process of buying securities and the hiking of interest rates. Now that he has awoken to the risks in giving weight to the hawks on the Fed board, Bernanke will assert himself more on the dovish side of monetary policy, so that all the good works since 2009 will not be debilitated in any manner. A very tricky business with ramifications for all of us. I must say that I’d rather have Bernanke handling this tricky balancing act than some more unknown economist. Maybe he could bring the exceptionally wise Stanley Fischer, Bernanke’s PHd. adviser at MIT in 1979 and the retiring head of the Bank of Israel, back to Washington to help oversee the transition in monetary policy.
Not Written by me, Taken from Internet.