Stephen Foley: Helicopter Ben rides again

US Outlook: The rotor blades are whirring again at the Federal Reserve helipad. Helicopter Ben – as chairman Ben Bernanke is known for showering money on the blazing fires of the credit crisis – has put new quantitative easing (QE) on the agenda for fighting deflation and a double-dip.

Now the size of the Fed's balance sheet is an explicit tool of monetary policy, it important to work out its relationship with interest rates. How much new money does the central bank have to print, and how many US Treasury bonds must it buy, to achieve a desired reduction in rates for businesses and homebuyers? Evidence from the QE programmes of the Federal Reserve and the Bank of England last year is that they lowered rates by a full percentage point in many areas. The question is whether the bang for central bank bucks was large because credit markets were unusually illiquid. Mr Bernanke's own research on Japan suggests that, in normal times, QE might have a much tinier impact.

As the chairman's chopper takes to the skies again, he is in urgent need of a compass.

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