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The Possibility of Fed's QE3 Print E-mail
Special Reports | Written by ActionForex.com | Apr 13 12 09:04 GMT

The Possibility of Fed's QE3

Speeches from Fed officials have been directing market expectations of QE3. The FOMC minutes for the March meeting indicated that policymakers saw less urgency to implement QE3 due to improvement in the economic backdrop. Yet, the Fed Chairman Ben Bernanke's speech regarding stimulus and the job market, and Vice Chairman Janet Yellen's comment that 'a highly accommodative policy stance to be appropriate' have once again sparked speculations on QE3. The current developments suggest that further QE is still likely, but only after completion of Operation Twist and upon rapid deterioration of economic growth.

Speculations of QE3 dampened sharply after the March minutes unveiled that only 'a couple of' members believed further quantitative easing measures are needed 'if the economy lost momentum' or if inflation stays below the target of 2%. The Fed saw growth in the coming quarter to be 'moderate', improving from 'modest' as described in previous meetings. The upbeat comments were driven by the encouraging job market during the inter-meeting period.

While doves were disappointed by the minutes, recent comments from Bernanke revived their hopes. The Fed Chairman said late last month that additional easing is needed to further boost the job market. If the gains in payrolls were a 'reversal of the unusually large layoffs that occurred during late 2008 and over 2009, then 'significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses'. The weaker-than-expected March employment report has indeed rekindled hopes of many investors.

His comments were echoed by Vice Chairman Janet Yellen who stated that 'a highly accommodative policy stance to be appropriate in present circumstances' and the rhetoric of keeping interest rates at exceptionally low levels until late 2014 should be maintained. The financial markets reacted positively to these comments.

Yet, it's not unanimous among the central bank with regard to the monetary stance. For instance New York Fed President William Dudley was concerned that Fed's asset purchases would fuel inflationary pressure which he opined would resume later this year.

As such, vigorous debate is expected among the Fed regarding under what conditions would further measures be adopted. Indeed, Yellen has mentioned a rather high threshold for QE3 such as a scenario in which the unemployment rate remained above 8% until early 2014 and that the recovery was faltering or less strong, or if inflation was expected to remain persistently below target. Under the current situation, it appears that the chance of QE3 has reduced from several months ago. Yet, further easing is still likely, but only after the operation twist has been completed and the economic outlook has weakened rapidly.

 
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