“The Federal Reserve doesn’t need to jolt the economy with a third round of liquidity-inducing quantitative easing (QE3), as the inflationary effects could be damaging, says Federal Reserve Bank of St. Louis President James Bullard.
Under quantitative easing, the Fed buys Treasury bonds, mortgage-backed securities or other assets from banks, pumping liquidity into the financial system with the aim of juicing the economy, encouraging more hiring and stabilizing prices.
The Fed has rolled out two such policies since the downturn, which are often seen as tools used to kick-start the economy when normal policies like interest-rate cuts aren’t enough, with mounting inflationary pressures seen as an eventual side effect.
Now is not the time for such a move, Bullard says, as the economy would really have to tank to consider such policy.
“I think QE3 would require the economy to deteriorate somewhat from where it is right now,” Bullard says, according to CNBC.
“The basic story on the U.S. economy is that we’ve had good news over the last six months or so, especially compared to the recession scenario that was being painted in the August-September time period of last year.”
Liquidity from quantitative easing often finds its way to commodities markets, and another round could send already pricey crude oil even higher.
“I think one of the biggest mistakes is continue to throw us much more in the way of monetary injections into the economy and with that, you get a much higher increase in commodity prices and potentially produce less global consumption across the world, which slows economic activity down,” Bullard says….”
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