QE3 Unlikely to Unfold?

Posted by - Tuesday, December 13th, 2011

Bloomberg economists believe that the Federal Reserve will “revise its pledge” that originally promised to keep interest rates near zero through the middle of 2013 “as the need for large scale asset purchases diminishes.”

Holding the interest rates so low for so long has helped push mortgage rates down substantially. This has been helpful, but we can't keep holding the economy up on a weak crutch forever...

According to Bloomberg:

The national average for a 30-year fixed-rate mortgage was 3.99 percent as of Dec. 8, according to a Freddie Mac index. The index touched a record low 3.94 percent on Oct. 6.

“Eventually the economy has to be weaned off of these steroids, and if we just keep throwing more and more stimulus at it, the economy will never find its own legs without risking some sort of inflation flare-up,” said Carl Riccadonna, senior U.S. economist at Deutsche Bank Securities Inc. in New York.

Today's Federal Reserve meeting began at 8:30 a.m. EST. Officials don't expect a statement to be released until about 2:15 this afternoon.

The pre-existing notion that the Fed would initiate a third round of quantitative easing has subsided for a majority of observers. Although experts no longer expect to hear about a new round of bond buying, the do think that will still eventually happen down the road.

From the sounds of it, the economy still needs a pseudo-dramatic pick-me-up; but the Fed seems to finally understand the risks of initiating QE3.

Although the economy was showing some optimistic signs of consumer confidence and slight growth, a November sales report released on Tuesday was a bit softer than anticipated. Some big retailers even reported a profit drop – Best Buy was one such company that saw their profits take a toll due to extreme extreme discounts on popular electronics this holiday season...

It appears that the uncertainty that's been plaguing our nation for months has not quite left after-all.

Policymakers fear that the crisis in Europe could create a contagion effect with the potential to feeze markets; similar to what happened in the 2008 financial meltdown.

Even if we are able to avoid that tragedy, Europe's recession could hurt the United States more-so than many of us would care to admit. 

Given the uncertainty, the U.S. central bank appears ready to hold both communications and easing tools at the ready for possible use in early 2012.

"We ... continue to face significant downside risks, mostly related to the stress in the euro zone," New York Federal Reserve Bank President William Dudley said last month.

Many observers expect the Fed to begin publishing the interest rate forecasts of its senior officials, perhaps as soon as January, when it issues its next quarterly economic projections.

Instead of full-blown QE3, the Fed has been considering adopting an “explicit infaltion target to reassure markets it will not let price pressures gain an hand even as it pushes hard to jump-start a stronger recovery.” 

But don't expect to hear too many details on the matter today. Experts feel that the Fed will wait even longer to actually launch whatever new initiatives they feel will give our economy a better boost. There's an important two-day meeting to be held on January 24-25. Analysts think this will be the time for the Fed to really start acting on whatever new plans they discuss in today's meeting. 

Meanwhile, markets are expecting that the Fed will make some big moves in the near future.

In a Reuters poll earlier this month, economists at 13 of the 20 financial firms that deal directly with the Fed said they expect the central bank to buy more mortgage-backed securities. The median estimate of the bond-buying initiative was $550 billion.

Of the economists polled, 17 of 20 expect the Fed to overhaul its communications framework.

*Indented excerpts fro REUTERS.


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