Economists: third round of Quantitative Easing unlikely
After Monday’s market turmoil, all eyes turned to the Federal Reserve to see how the central bank and its chairman, Ben Bernanke, would react. Most of the speculation focused on whether Bernanke would announce a third round of quantitative easing, or QE3.
But while talk circulated Tuesday morning about a possible QE3 announcement, some economists said the move is unlikely.
According to James Rickards, senior managing director of Tangent Capital, the only thing onlookers can expect from the Fed on Tuesday is more of the status quo.
In an interview with The Daily Caller, Rickards said, while he would not rule it out in the months ahead, the Fed would not announce a QE3 Tuesday, citing three main reasons.
For starters, said Rickards, “The Fed lacks credibility because QE2 failed.” There is also a big central bank meeting scheduled for late August in Jackson Hole, Wyoming, and the Fed will likely hold off on debate of a third round of quantitative easing until then. And finally, there’s Europe.
Since European countries started experiencing their own major financial difficulties, they recently started pushing their own version of QE, or, what Rickards calls “EuroTarp”.
“It’s got to be approved by all the members, and is going to take a couple months,” said Rickards. “Likely, the Fed will want to coordinate efforts with the European Central Bank, first and there hasn’t been time to do that since the euro-crisis flared up recently.”
In fact, said Rickards, the economy would have to get “much worse before they get to QE3.”
Anthony Randazzo, Director of Economic Research at the Reason Foundation, agreed, telling TheDC that another round of QE is unlikely at this point.
“When it comes to the Fed considering its options you have to consider the problems,” said Randazzo. “And other than buying up all the debt remaining in the system, Bernanke can not do much. We are in a contracting economy that was goosed by debt but is now deleveraging.”
“Until that stops we will suffer,” he added.
And when it comes to QE3, said Randazzo, while the financial industry would certainly welcome more free cash, “they are unlikely to change course with QE3 money and lend that out into the economy en masse.”
When the Fed releases its statement later Tuesday afternoon, Rickards said to expect Bernanke to acknowledge a weak economy, and that they will keep the current interest rate policy for an extended period. But when the Board of Governors spend 10 percent of their time on policy and 90 percent on “word-smithing,” quipped Rickards, “who knows what exact magic words they’ll try to come up with.”
When markets closed Monday, after the first full day of trading after the downgrade from Standard & Poor’s, the Dow was down 633 points, or 5.54 percent. The full force of the unprecedented downgrade had hit Wall Street head-on. There is a consensus, however, that the pain is here to stay, at least for a while.
As Tony Fratto, founder of Hamilton Place Strategies, told TheDC on Monday, “We’re going to be at lower levels on the stock markets for some time. It’ll be a long time, I think before we see any sign of returning to the levels we were at.”
In the meantime, Rickards told TheDC, “You have a weak president, a Fed that’s on hold, a dysfunctional Congress, and growth falling off a cliff and markets on the edge of panic. There’s your scenario.”