No QE3, so ball now in politicians' court

Business Times - 24 Jun 2011

No QE3, so ball now in politicians' court


POLICYMAKERS at the US central bank have been surprised by the continuing weakness of the American economy - but they are hoping that things will pick up later this year.

This sense of apprehension about the current slow pace of the economic recovery was expressed by the members of the Federal Open Market Committee (FOMC) on Wednesday, following a two-day meeting in Washington during which they agreed to shift policy and to end the US$600 billion bond-buying programme (aka QE2, or Quantitative Easing Part 2) as scheduled by the end of this month.

Much of what the Federal Reserve announced on Wednesday should not have come as a big surprise to politicians in Washington or to investors on Wall Street, who share the growing anxiety about the feebleness of the recovery.

The Fed in its statement, and chairman Ben Bernanke during a press conference, seem to be providing official confirmation of this conventional wisdom by stressing that despite the moderate pace of growth and the labour market weakness, the central bank does not have any major monetary tool in its disposal to change these depressing economic realities.

The only piece of relatively good news that came from the two days of the meeting was the Fed's insistence that inflation was going to subside in the coming months as energy and commodity prices start to moderate.

During his press conference, Mr Bernanke reiterated that there was 'uncertainty' among the FOMC members about the extent to which the slowdown in the economic recovery was temporary, and caused by factors such as the Japanese earthquake and tsunami. He also said that there were only 'small' risks to US banks from a potential Greek default.

Making it clear that the Fed does not have any plan to launch another round of quantitative easing or QE3 after the current QE2 ends next week, Mr Bernanke highlighted the differences between the economic conditions last August when the Fed decided to use a controversial monetary tool to the help stimulate the economy and the current economic situation.

The QE2 got underway when 'inflation was very low and falling, and many objective indicators suggested deflation was a non-trivial risk' and the monthly rate of job increase was very low, according to Mr Bernanke. But now as non-farm payrolls are averaging a gain of 180,000 jobs a month and the stock market is up 20 per cent from last year, the central bank is no more under pressure to embark on a new round of quantitative easing.

Moreover, leaving its key interest rate at the very low range of 0 to 0.25 per cent, the FOMC also repeated that rates are likely to stay at the same historic low where they have been since December 2008 for an 'extended period'. Mr Bernanke explained during the press conference that could mean that no change in the rates are expected to be made in the next three policy meetings and perhaps even for a longer period.

In a way, the Fed is signalling to the White House and Congress that while the central bank will continue to buy debt and keep its key interest rate at zero, politicians in Washington cannot rely on the Fed to help them change the unemployment numbers or the the conditions in the housing market in any dramatic way.

The Fed has tried to provide the ailing economy with some pain-killing pills but the patient is now waiting for President Barack Obama and the Republican and Democrats on Capitol Hill to come up with a cure in the form of a major fiscal surgery, including spending cuts and changes in the tax system and will provide for the long-term health of the American economy.

In short, the Fed has passed the ball of economic policymaking to the politicians. And now it is in their court.

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.


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