Tags: Fed | QE3 | Bernanke | inflation

CNNMoney: Fed Shouldn’t Do More QE, as Interest Rates Aren’t the Problem

Thursday, 04 Oct 2012 10:19 AM

By Michael Kling

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The markets want more and more quantitative easing. As far as the markets are concerned, more is never enough.

Economists at Goldman Sachs predict that the Federal Reserve's third round of quantitative easing (QE) might run to mid-2015. Not enough. It would reach a total of $2 trillion. Not enough.

But it should be enough, writes Paul La Monica, assistant managing editor for CNNMoney, saying the Fed should just say "No."

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

Some economists say QE3 won't be enough and the Fed need to employ more easing — call it QE4, QE infinity or some name, he notes. Or the Fed could simply increase its mortgage-security purchases in a super-charged version of QE3.

"QE3 will likely be insufficient to significantly boost equity markets and we wouldn't be at all surprised to see the Fed dramatically augment this program before year-end," states Adam Parker, chief U.S. equity strategist at Morgan Stanley, according to La Monica.

Investors expect the Fed to save the markets regardless of what Congress does, and that will eventually lead to inflation.

The Fed's credibility is at stake, he writes.

Leslie Barbi, head of fixed income at RS Investments, says, "The Fed's credibility is starting to get a little tattered around the edges. The Fed is trying to have their cake and eat it too. It seems like they want to tell people they will keep easing even after the economy improves, but also tell them that if they need to fight inflation, they will. That's a conflict."

Fed Chairman Ben Bernanke must realize that the Fed cannot justify more easing despite slow job growth and the approaching fiscal cliff, La Monica writes. At least not at this time anyway.

Interest rates are is not the problem, La Monica stresses, as monetary policy is loose and rates are already low.

Although it keeps talking about monetary policy, the Fed is actually probably worried about the fiscal cliff — the potential failure of Congress to reach a budget deal that prompts drastic budget cuts and tax increases, he observes.

Bernanke argues that inflation is under control. “[T]he Federal Reserve’s price stability record is excellent and we are fully committed to maintaining it,” he said in a speech to the Economic Club of Indiana.

QE3, in which the Fed will buy $40 billion of mortgage-backed securities a month, is part of the same monetary policy the Fed has always used, he said.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

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