With the information I have today, my first inclination is to be very cautious about extending asset purchases after June. Given the emergence of new risks, however, I prefer a posture of flexibility as regards policy options. As we have seen, conditions can change rapidly, so I will continue to evaluate the incoming information as much as possible with fresh eyes as I approach each meeting and each decision.

Lockhart said he disagreed with the view that the central bank should extend its Treasury purchases into the third quarter at a slower pace, a “tapering” approach similar to how the Fed ended an earlier program to buy mortgage-backed securities.

“I wouldn’t totally rule it out, but I don’t think it gains a lot,” he told reporters. “The amount of purchases is manageable within the markets, and the markets understand this program runs through June. So I don’t see a lot of gain to reverting to a tapering approach.”

As reported by Bloomberg News

REP. HENSARLING: As I looked in your testimony, I'm not sure you directly address the timing of the end of QE2, besides its natural termination in June. Today, do you -- are there any conditions that you see that you would anticipate a QE3?

MR. BERNANKE: Congressman, that has to be a decision of the committee and it depends, again, on our mandate. What we'd like to see is a sustainable recovery. We don't want to see the economy falling back into a double-dip or do a stall-out. And obviously, we're looking very closely at inflation -- both in terms of too low and too high.
And so I want to be sure that you understand that I am -- I am very attention to inflation and the potential risks for inflation and that will certainly be a major consideration as we look to determine how to manage this policy.

BERNANKE: Well, the intent of the {LSAP} program first was to hold down interest rates or term premia relative to where they otherwise would be.

SHELBY: Has that worked?

BERNANKE: That seems to be working, yes.

SHELBY: A lot of people dispute that. But go ahead.

BERNANKE: Well, as I noted in my testimony, interest rates have gone up.  The same thing happened in 2009 after our previous policy, because interest rates depend on future expectations of growth, as well as on -- on our policy actions.  With that being said, we certainly want to be sure to remove that stimulus at the appropriate time. So I'm at least as concerned as you, Senator, about inflation. We want to be sure we don't have an inflationary effect. So we must remove that at the appropriate time.

We learned in the first quarter of last year, when we ended our previous program, that the markets had anticipated that adequately, and we didn't see any major impact on interest rates. And so I don't expect when the time comes for us to end the program that we'll see a big impact. I think it's really the total amount of holdings, rather than the flow of new purchases that affects the level of interest rates.

And so there was a lot of talk about -- about double dip and that kind of thing. So we felt that we needed to take some action.

In terms of the $600 billion, we have tried through a number of methods to establish a correspondence between these purchases and what our normal interest rate policies would be.

And a rule of thumb is that $150 billion to $200 billion in purchases seems to be roughly equivalent to a 25 basis point cut in the federal funds rate in terms of the stimulative power for the economy.

And so $600 billion is roughly a 75 basis point cut in the policy rate, in terms of its broad impact.

Seventy-five basis points in normal times would be considered a very strong statement, a powerful move, but not one outside of the range of historical experience. It would be one that would be taken at a period of concern and then we would observe the effects. So that was roughly the analysis that we did.

From the Q&A session

MENENDEZ:   And so would you give me your view of how the first and second rounds of quantitative easing are working?

BERNANKE: I think they're working -- I think they're working well. The first round in March 2009 was almost -- almost the same day as the trough of the stock market. Since then, the market has virtually doubled. The economy was going from total collapse at the end of the first quarter of '09 to pretty strong growth in the second half of '09. And as I said, it's now in the seventh quarter of expansion. So I think that was clearly a positive.

The current -- the current Q.E, as it's called, as I've said, appears to have had the desired effects on markets in terms of creating stimulus for the economy. And I cited not just Federal Reserve forecasts, but private sector forecasts which have almost uniformly been upgraded since August, since November, suggesting that private sector forecasters are seeing more growth and more employment this year than they had previously expected. And so I think it is in fact having benefits for growth and employment.

From the Q&A session

It is also worth pointing out in passing that a failure to raise short-term interest rates at the appropriate moment based on our dual mandate objectives would also be a losing strategy with respect to net income. Inflation would climb, bond yields would rise and the Fed would ultimately be forced to raise short-term rates more aggressively, or to sell more assets at lower prices to regain control of inflation. This would almost certainly result in larger reductions in net income than a timelier exit from the current stance of monetary policy.

MR. KERNEN: I remember before QE2 started we were with you in St. Louis, and you gave us a little bit of a head fake here and there about whether it would actually -- that it was a done deal, that it was going to happen, when I think it was going to happen all along.

Now I feel like you're giving us a little bit of a notion that "We might end early" when, in fact, there's no intention of ending early.

MR. BULLARD: I'm telling you what I think. I'm just one guy on the --

MR. KERNEN: I know.

MR. BULLARD: -- one guy on the committee. You can talk to anyone else and see what they say.

MR. KERNEN: There won't be any QE3, though.

MS. QUICK: We did have a guest who sat here last week and said higher oil prices means we're looking at QE3. Is that --

MR. BULLARD: Well, I don't think we're in that position yet.   This has not gone on long enough. You'd have to see if the shock is really persistent. Also it doesn't strike me that it's really big enough at this point. You're talking, if I've had the numbers right, 98 bucks on West Texas Intermediate this morning. That's up. You know, it's certainly a concern, but it's not so high at this point.

I wouldn't be averse to stopping a little bit short on our QE2.

And, you know, you might say, like, okay, you only do $500 billion instead of $600 billion. Well, how much difference can that make? Well, not very much, but I like subtle judgments, because I think that's the game we're in. And we do want to send the signal that we are concerned about this and we do want to be able to unwind the balance sheet at some point.

..

I don't think you can print money indefinitely and be casual about what the consequences might be. You've got to be very serious that this could create a lot of inflation going forward. It has not. That's true. But this has to do with our credibility being able to move the balance sheet back to a more normal level in a reasonable amount of time.

[A recent study] suggests that conditions would have been even worse in the absence of the Federal Reserve's securities purchases: The unemployment rate would have remained persistently above 10 percent, and core inflation would have fallen below zero this year. Of course, considerable uncertainty surrounds those estimates, but they nonetheless suggest that the benefits of the asset purchase programs probably have been sizeable.

The improvement in the growth outlook has been noticeable enough to tilt the case further against QE2... To my mind, it was a close call to begin with.

MR. LIESMAN: Does it really matter that much if you stopped it in March or let it run through to June? Is that period of time a consequential period of time? Are the amount of bonds that could be purchased consequential?

MR. LACKER: Well, I think every $100 billion counts. You know, we're talking about where the starting line is likely to be for the process of unwinding monetary stimulus at some point when the time comes. And, you know, I don't want to move the starting line too far back.

MR. LIESMAN: Can you walk me through how you foresee the Fed withdrawing stimulus? Is it reducing the size of the portfolio first and raising interest rates? Are they together? Are they separate?
What's the process by which you would prefer?

MR. LACKER: So I think we'd have more -- personally, my sense is that there's pluses and minuses on either side. One of the advantages of reducing the asset purchase -- unwinding the asset purchases first is that I think we'd have a better handle on the effect of increasing interest rates through increasing the interest we pay on reserves.  We'd have a better handle on how that's going to affect other rates if the size of bank reserves was smaller.

Bullard stated that ahead of the November FOMC meeting, the policy change had been largely priced into markets, and the financial market effects were conventional. In particular, he said, “real interest rates declined, inflation expectations rose, the dollar depreciated, and equity prices rose.” Bullard added, “These are the ‘classic’ financial market effects one might observe when the Fed eases monetary policy in ordinary times.” Bullard concluded that “quantitative easing has been an effective tool, even while the policy rate is near zero.”

Since QE2 was announced, the economic outlook has improved, Bullard noted. “The natural debate now,” he said, “is whether to complete the program, or to taper off to a somewhat lower level of asset purchases.”

Q: Is QE2 working?

A: I would say it is having effects but at what price later on? My view is it is not just about intended consequences, it is about unintended consequences.

Q: How about tapering off QE2?

A: I certainly would. I am for tapering them off. If you can do it in the right way without disrupting the markets, then yes, by June or sooner. But that precondition is a pretty tough precondition – doing it in the right way, not disrupting markets.

Q: Communication?

A: Communication, communication, communication.