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Easy Money? Weighing the Odds of QE3

e21 | March 8, 2012

It seems like only yesterday, Chairman Bernanke said the Fed was ”prepared to provide further monetary accommodation” after the January 25th FOMC meeting. At that time, most questions regarding QE3 focused on when, not if. However, since then a run up in U.S. equities to four-year highs and strong employment data have brought the very need of QE3 back into headlines. With February’s Employment Situation due out Friday morning and expecting a third straight monthly gain of at least 200k jobs, the argument over the need for another round of security purchases by the Fed is ramping up. Here is some of the recent commentary regarding the need and likelihood of QE3:

Andy Laperriere in the WSJ:

But QE and ZIRP [zero interest rate policy] also reduce long-term economic growth by punishing savers, reducing saving and investment over the long run. They encourage the misallocation of resources that at a minimum is preventing the natural rebalancing of our economy and could sow the seeds of another painful boom-bust.

Dallas Fed President Richard Fischer in a March 5 speech:

I think it's a fantasy of Wall Street - it's not going to happen, it's not necessary…Indeed, excessive monetary accommodation might only add a further dosage of angst, because it will fuel fears of future inflation.

Vincent Reinhart, Chief Economist at Morgan Stanley:

We share the view that the fillip to economic growth associated with a restocking of inventories is fading and that real GDP growth will slow notably in the current quarter… Anxiety-inducing headlines that the economy is losing steam will be conducive to Fed action…For some time, our call has been that the Federal Reserve will undertake additional balance-sheet action in the first half of 2012.

The need for another round of monetary accommodations from the Fed is likely to be a fickle one. Many policymakers will ride the ebb and flow of economic data in the coming months with QE3’s likelihood in the balance. Meanwhile, markets, especially U.S. equities will hope for more accommodation to help repeat the bullish gains of prior easements. The variables regarding the likelihood, timing, and scope of further monetary accommodations by the Fed are many, which bring further uncertainty to an economy already pondering the future of the Euro, new regulations, tax reform, and a presidential election.


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