Has Bernanke embarked on a new QE2 program? What will be the impact to the economy?

Last week, Bernanke and the FOMC have predictably maintained its pledge to keep the federal funds target low for an extended period which has been the same from beginning of 2010 until now. However, there is a twist this time around. The Fed also announced that the principal payments on its mortgage-backed securities(MBS) and agency debt would be reinvested in Treasuries, with $2 trillion floor adopted for the securities portfolio. These purchases will help keep Treasury yields and mortgage costs low and prevent the level of monetary stimulus from shrinking further.

What prompted the Fed to do more quantitative easing rather than signaling an exit strategy in 2nd half of 2010? The answer: The Fed was cognizant of the fact the economy is losing momentum with latest unemployment figure hovering north of 9%. Therefore, the Fed signaled its willingness to intervene, if necessary.

On the surface, it seemed the policy action announced did not have major implications to the economy. However, the Fed is quietly laying the groundwork for further monetary stimulus and a gradual policy shift. To Bernanke, deflation risks must always be nipped in the bud before they could rear their ugly heads. Hence, his nickname "Helicopter Ben".

If the economy deteriorates further, the Fed would have no choice but to swell the balance sheet level further. The problem is the Fed purchase of Treasuries is unlikely to stimulate the economy and reduces unemployment. One critic is Anthony Crescenzi from Pimco. He argued that creation of jobs and emphasis on investments, not consumption should be the government priorities and policies. Furthermore, he harped that the government should build programs to increase the level of exports.

It would be interesting to note actions the Fed would take in the coming FOMC meetings. The million dollar question is where the economy is heading and whether further stimuli are needed to bolster the economy.