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Fed Running Out Of Options To Ward Off Double-Dip Recession

With the economy growing at a snail's pace and the job market still disconcertingly weak, economists are wondering whether the Federal Reserve will undertake a new round of stimulus efforts to keep the country from slipping into a double-dip recession. Even if the Fed goes that route, however, it may not have much of an effect. Such a program would be known as QE3 -- a third session of quantitative easing, which the Fed has done twice before. "Quantitative easing" refers to the Fed buying up assets, particularly longer-term Treasury bonds, as a way of pumping more money into the economy and stimulating investment. Both rounds of quantitative easing have occurred during the current economic crisis, with the previous round, known as QE2, lasting from November 2010 to June of this year. Economists gave it decidedly mixed reviews. At the end of QE2, unemployment was still high, GDP growth was discouragingly slow and consumer spending was on the way down. Critics of quantitative easing say that not only was the second round ineffective, but the influx of new money put the country at greater risk of inflation. Nevertheless, stimulus advocates are keeping a close eye on the Fed, looking for signs that QE3 is on the way. Not everyone believes that it is. "The hurdles facing QE3 are very high," said David Jones, an executive professor of economics at Florida Gulf Coast University's Lutgert College of Business. "It%E2%80%99s not off the table completely, because if we do have a double-dip, anything is on the table. But it's off the table for now." Jones told The Huffington Post that QE2's opponents criticized the program so ardently -- both in the U.S., where analysts worried about inflation, and overseas, where the flood of new dollars was seen as tipping the international trade balance unfairly in America's favor -- that it's unlikely Federal Reserve Chairman Ben Bernanke will try a new round of bond-buying unless it's the only way to stave off disaster. "The Fed is much better at pulling us back from the abyss -- like it did in the credit crisis of 2007-2008 -- than it is at trying to boost growth in a recovery," said Jones. Even so, many economists believe QE3 is coming sooner or later. In a recent CNBC poll, 46 percent of economists surveyed said they expected the Fed to undertake a new round of easing, compared with just 37 percent who said it would not. Earlier this week, Goldman Sachs researchers published a note saying that there is "no question" Bernanke will have enough votes on the Federal Open Market Committee to implement QE3, and that they "fully expect him to use these votes ... if he views it as necessary." Analysts from Harvard, Credit Suisse, Standard Life and a number of other institutions have also said that QE3 seems like a distinct possibility. For its part, the Fed has said only that it plans to keep interest rates near zero through the middle of 2013, as a way to encourage corporate borrowing and investing. On Tuesday, a day after the Dow plunged more than 600 points in a single session, Bernanke said the Fed had "discussed the range of policy tools available to promote a stronger economic recovery" -- a phrase that many market participants have taken as a veiled reference to a new round of bond-buying coming up. Drew Matus, a senior economist at UBS, says it would be a mistake to jump to that conclusion. "In the context of a market that had been down very sharply the day before, that was them reassuring people that they still have ammunition," Matus told The Huffington Post. The markets did seem placated after Bernanke%E2%80%99s remarks, rallying to finish up more than 400 points on the day. But while Bernanke may have the power to move markets in the short term, there are doubts as to whether new easing efforts would even have the desired expansionary effect. Jones told The Huffington Post that the country is reaching a point of "diminishing returns" with its asset-purchasing programs, and inflation hawks have argued that QE3 would drive up the price of commodities like gas and oil, leaving consumers unable to spend money on anything but necessities. QE3 speculation could rise to a fever pitch in the next couple of weeks, as many believe the Fed will save any major statements for its August 26 conference in Jackson Hole, Wyo. It was at this conference last year that Bernanke indicated that QE2 was on the way. Matus, for one, doesn%E2%80%99t expect a similar announcement this time. "UBS's view is that [QE3] is not going to happen," he said. "In my mind, Bernanke hasn%E2%80%99t got as much flexibility as a lot of people think he does."

http://www.huffingtonpost.com/2011/08/13/qe3-federal-reserve_n_925985.html


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