Could QE3 Help the Economy?
Why another round of quantitative easing might not be a cure-all for the economy
A third bond-buying program by the Federal Reserve -- or quantitative easing, as it's commonly called -- is likely to resume by the
end of the year or in early 2012,
"We have changed our call because [the Fed's] statement suggests that the committee's reaction function to incoming economic news is more dovish than we had previously thought," said the report, which also cited remarks by the Federal Open Market Committee that it would employ additional policy tools if economic conditions deteriorated further.
While this might be welcome news for jittery investors clamoring for Fed intervention to help boost market confidence, experts caution that another round of quantitative easing wouldn't be a panacea for the ailing U.S. economy. Some critics say it would likely amount to just another Band-Aid on the economy's skinned knees.
For starters, the global economic landscape is drastically different than it was when the Fed launched its second quantitative easing program, QE2, in
The challenges policymakers face differ tremendously as well. Back in 2010, deflation was the crisis of the moment, with markets fearing an unavoidable downward spiral of lower prices, weak demand, and massive lay-offs. Despite the many critiques leveled at the bond-buying program, QE2 seems to have staved off deflation, preventing a vicious cycle that could have plunged
Inflation is now the enemy. Through June, the Consumer Price Index (CPI), which measures the average change in prices of goods and services over time, has increased 3.6 percent over the past 12 months, according to the
"QE2 prevented deflation, which would have been really bad for the jobs situation," says
While the economy might have sidestepped a deflation disaster for the time being, a host of other grave economic problems confront the country, the most pressing being less-than-stellar growth over the past few years. According to recent government figures, GDP grew a meager 1.3 percent in the second quarter, revised downward from initial estimates of almost 2 percent. That figure comes on the heels of a stunningly low 0.4 percent GDP growth rate in the first quarter of the year. Exacerbating a situation already rife with uncertainty and angst, the debt-ceiling drama concluded with the first-ever downgrade of U.S. debt, sending shockwaves through equity markets worldwide.
The situation across the pond doesn't look much better. With much of
The uncertainty these factors create has consumers and businesses more nervous than ever, experts say, which makes them more unlikely to spend or invest in such a volatile environment. That's a phenomenon no amount of quantitative easing or low interest rates can solve. "Monetary policy should help economic activity, but right now it's just not working," LeBas says. That's because the money the Fed has been pumping into the economy has been going right back into their coffers, he says. "Banks are taking that cash and just re-depositing it with the Fed. It's not that banks don't want to loan money, it's because they can't. There's very little loan demand out there from consumers and businesses."
Scars from the financial crisis are still visible, with many Americans either too scared to borrow because they've been burned in the past, or because they've effectively priced themselves out of new loans by defaulting on their mortgages.
"It's almost like the Fed is sitting here trying to start a car that doesn't have any gas in it," LeBas says. "You can go at it all you want, it's just not going to have much effect."
On the surface, the Fed laid the groundwork for more intervention in its August meeting, pledging to keep interest rates low for the foreseeable future. Economists say that will have a similar effect as quantitative easing -- lowering longer-term interest rates to stimulate borrowing -- without further inflating the Fed's balance sheets. Nevertheless, experts don't expect the Fed to come to the rescue anytime soon.
"If you want to do a QE3, you don't do it until the situation is dire enough for it to have an impact, because on the margin you're upping the ante every time you do it," Swonk says.
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