Last November, after considerable deliberation, the FOMC decided to purchase an additional $600 billion of longer-term Treasury securities. This asset purchase program has been commonly referred to as QE2. Based on my reading of the economic outlook and challenges that the economy faces, I have expressed some doubts that the benefits outweigh the costs of this policy. However, I supported continuation of the policy in January because it is generally a good practice for a central bank to do what it says it is going to do unless circumstances significantly change. To do otherwise would undermine the institution’s credibility.

When the asset purchase program was adopted, the Committee also said that it would review its planned purchase program on a regular basis, and I take that promise to review seriously. Policy, after all, must also be dependent on the evolution of the economy so when the outlook for the economy changes in an appreciable way, so should policy.

Should economic prospects continue to strengthen, I would not rule out changing the policy stance to bring QE2 to an early close. Thus, I will continue to look at the data and consider revising my forecast and preferred policy path as we gain more information on economic developments in the coming months. If the growth rates of employment and output begin to accelerate or if inflation or inflation expectations begin to rise, then it may be time to begin taking our foot off the accelerator.

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 The question is not can we do it, but will we do it at the right time and at the right pace. Since monetary policy operates with a lag, the Fed will need to begin removing policy accommodation before unemployment has returned to acceptable levels. Will we have the fortitude to exit as aggressively as needed to prevent a spike in inflation and its undesirable consequences down the road?

Several notable forces combined to encourage the resumption of stronger growth. On the policy side, as I mentioned, the Federal Open Market Committee provided further stimulus through purchasing Treasury securities. This, plus the lagged effects of its previous measures, helped to improve financial conditions.

Dealers then submit offers to sell those securities, either for their own accounts or on behalf of their customers, over a 45-minute period on the morning of the operation. Those offers are assessed by the Desk based on two criteria: their proximity to market prices at that time, and an internal methodology for comparing the relative value of the securities at the offered prices.

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Our success at purchasing such large volumes of securities without causing significant market strains reflects some of the operational decisions that were made in the design of the program. One key issue was determining an appropriate speed for purchasing assets. The pace of purchases under the announced plan reflected a judgment by the Desk that it could purchase as much as $100 billion to $125 billion per month without significantly disrupting the functioning and liquidity of the Treasury market. So far, that appears to be the case, given the evidence just described.

Implementing the program over an eight—month period would not be expected to significantly reduce the speed or magnitude of its effects on financial conditions and, ultimately, on the real economy under the view that the program's effects arise from the expected stock of our holdings rather than the flow of our purchases. Under this view, financial conditions react immediately to the announcement of the program, bringing forward its effects on financial conditions. This view provides policymakers with some flexibility regarding the amount of time to implement the total amount of purchases.

REP. RYAN:  It seems to me that the argument here is that the intention of QEII is what we ought to be focusing on because the intention is to bring rates down through economic growth, and therefore, the intention is what should matter here. But this is debt monetization. So isn't that really a distinction without a difference?

MR. BERNANKE: No, sir. If monetization would involve a permanent increase in the money supply to basically pay the government's bills through money creation, what we're doing here is a temporary measure, which will be reversed so that at the end of this process, the money supply will be normalized. The amount of the Fed's balance sheet will be normalized and that there will be no permanent increase either in money outstanding, in the Fed's balance sheet or in inflation.

MR. BERNANKE: A very careful study done by Federal Reserve system economists suggests that the total job impact of all of the QE programs -- including QE1, including the reinvestments, including QE2 -- could be up to 3 million jobs. It could be less; it could be more, but the important to understand is that it is not insignificant. It is an important contribution to growth and to job creation...

REP. VAN HOLLEN: All right. So as I understand, that was a credible study in your view, was it not?

MR. BERNANKE: It is, and there have been other studies as well, which are comparable.

REP. VAN HOLLEN: And as I -- just focusing on QE2, my understanding is that just with respect to that, those monetary decisions, that that created or saved between 600 (thousand) and 700,000 jobs. Is that correct?

MR. BERNANKE: The same study attributes -- again, prospectively -- in part, to the $600 billion QE2 about 700,000 jobs. Again, let me just emphasize that these are simulation studies and -- but they do indicate that the potential impact is significant.

From the Q&A session

REP. CAMPBELL: Halfway through. What are the metrics that you'll -- when QE2 finishes, presuming in June -- and you mentioned that you could reverse it, or whatever -- what are the metrics that you are following that would lead you either to believe you should have QE3 or that you should reverse QE2?

MR. BERNANKE: Well, first is the question of efficacy. And we are seeing the intended results in terms of financial markets, in terms of financial conditions. So in that respect, we think that it's being successful.

In terms of looking forward, we will be trying to assess whether the recovery is on a sustainable track -- and things have moved in that direction, which is encouraging. And we'll be trying to assess whether inflation is low and stable, at around 2 percent or a bit less, which we think is about the right level and most other central banks think is about the right level. And looking forward, if that appears to be the trajectory we're on, then additional action would not be necessary. If we're still in a situation where the recovery does not seem established and deflation risk remains a concern, then we would have to think about additional measures.

Once the economy has a self-sustaining -- you know, once it's sort of reached escape velocity, so to speak, then that monetary fuel can be withdrawn. And usually that would involve raising short-term interest rates. In this case, it would involve both raising short-term interest rates and reducing the size of the balance sheet.

So, yes, as the economy begins to get stronger and develops its own momentum, then it needs less monetary policy support and we have to begin to withdraw it. Otherwise, we would risk inflation, as Chairman Ryan was concerned about.

We asked the hypothetical question: If we could lower the federal funds rate, how much would we lower it? And a powerful monetary policy action in normal times would be about a 75-basis-point cut in the federal funds rate. We estimate that the impact on the whole structure of interest rates from 600 billion (dollars) is roughly equivalent to a 75-basis- point cut. So on that criterion, it seemed that that was about enough to be a significant boost, but not one that was excessive.

``{Tapering} is certainly a pertinent topic but my working assumption is the schedule of purchases as stated is going to be held to closely.''

``My working assumption is we will carry through with the full scale of the program over the time frame we laid out, which is through June.''

In response to a question about about whether the Fed would consider tapering off its $600 billion purchase program

The entire FOMC knows the history and the ruinous fate that is meted out to countries whose central banks take to regularly monetizing government debt. Barring some unexpected shock to the economy or financial system, I think we are pushing the envelope with the current round of Treasury purchases. I would be very wary of expanding our balance sheet further; indeed, given current economic and financial conditions, it is hard for me to envision a scenario where I would not use my voting position this year to formally dissent should the FOMC recommend another tranche of monetary accommodation. And I expect I will be at the forefront of the effort to trim back our Treasury holdings and tighten policy at the earliest sign that inflationary pressures are moving beyond the commodity markets and into the general price stream. I am a veteran of the Carter administration and know how easily prices can spin out of control and how cruelly markets can exact their revenge. I would not want to relive that experience.

The Committee recognized that the provision of further monetary stimulus at this point in the business cycle is not without risks, and therefore committed to regularly review the pace and overall size of the asset-purchase program in light of incoming information and adjust the program as needed. The distinct improvement in the economic outlook since the program was initiated suggests taking that re-evaluation quite seriously. That re-evaluation will be challenging, because inflation is capable of accelerating, even if the level of economic activity has not yet returned to pre-recession trend.

A wide range of market indicators supports the view that the Federal Reserve's securities purchases have been effective at easing financial conditions. For example, since August, when we announced our policy of reinvesting maturing securities and signaled we were considering more purchases, equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed, and inflation compensation as measured in the market for inflation-indexed securities has risen from low to more normal levels. Yields on 5- to 10-year Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases. All of these developments are what one would expect to see when monetary policy becomes more accommodative, whether through conventional or less conventional means. Interestingly, these developments are also remarkably similar to those that occurred during the earlier episode of policy easing, notably in the months following our March 2009 announcement of a significant expansion in securities purchases. The fact that financial markets responded in very similar ways to each of these policy actions lends credence to the view that these actions had the expected effects on markets and are thereby providing significant support to job creation and the economy.

Well, first, to be very clear, the purpose of the monetary policy easing is not to increase stock prices per se. The purpose is to strengthen the U.S. economy, put people back to work, and create price stability.

But the way monetary policy always works is through interest rates and asset prices. That's how it always works, by changing those prices in financial markets.

So, yes, I do think that by taking these securities out of the market and pushing investors into alternative assets we -- we have led to higher stock prices and to lower stock market volatility.

By the way, when we -- the last time we did this, in March 2009, was about a week before the absolute minimum where the Standard & Poor was in the 600s. And following our actions, Standard & Poor, the stock market rose quite considerably.

So, yes, the policy is affecting the -- the stock market really in two ways. One is by -- is by through -- is by lowering, essentially, long-term yields and forcing investors into alternative assets.  But, also, because as this process has been working through -- as we have seen both in the earlier episode, that a few months after we began the process we began to see a stronger economy, this time we really began this process in August, and now, four, five months later we're seeing a stronger economy.

As the markets see the stronger economy materializing, that's incorporated into expectations about future profits and future economic activity, and that causes the market to rise as well. So it's a virtuous circle in that respect.   So as I described in my remarks, the whole idea here is to -- is to move interest rates and move asset prices in a direction that will stimulate more economic activity, put more people back to work, and -- and get rid of risk of deflation and create a stable price environment.   And if you look at the developments, since August I think things have moved very distinctly in the right direction.

You can never say never, but I cannot imagine a convincing argument for further quantitative easing after this round, given what is developing now in the economy.