June 2011 and the end of QE2

Krugman quotes Flyod Norris:

Mr. Bernanke makes clear there will be no QE3. And he hopes that it will not have much impact when the purchases end: "We are just going to let the purchases end. Our view is that the end of the program is unlikely to have substantial effects on the economy or financial markets."

He bases that on the fact that all this has been well telegraphed, which is true enough, and then goes into jargon. "We subscribe to the stock view," he says.

That is not the view held by the stock market. Rather it is the size of the Fed’s portfolio -- the stock of securities held by the Fed -- that matters. And that will not change because the Fed will reinvest proceeds from maturing securities.

That’s exactly what I was saying in this post. Like Bernanke, I don’t believe that the flow of Fed purchases has been an important factor holding bond rates down, and hence don’t believe that they will jump when the purchases end.

Bill Gross of PIMCO believes otherwise, but I believe Bernanke and Krugman are correct.