Another Round of QE (Quantative Easing) May Not Be Necessary?

1 Mar

Ben Bernanke (Fed Chairman ) surprised markets on Wednesday with his comments during the first of two days of Congressional testimony. This suggested that further QE may not be necessary as US GDP improved.

The statement, or lack of further stimulus helped send stocks lower, the dollar higher and precious metals to their worst day in more than two months.

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 Traders were concerned by what Ben Bernanke didn’t say. The fact QE3 was absent in his testimony, indicates a possible change in thinking. The Fed had been expected by many to embark on a third round of quantitative easing.

Comments also came from the Bank of England (BoE), saying there isn’t a case for more stimulus after the BoE’s current round of bond purchases is complete, adding that rising energy costs threaten to bring inflation.

Bernanke also raised the concern of an increase in inflation from rising fuel prices. The Fed has made it clear that if inflation were to become a factor, the likelihood of QE diminishes.

 

The two factors that would push the Fed to ease were high unemployment and tight lending. Unemployment has started to trend down slowly and is currently below the Fed’s expectations (last reported at 8.3%). Although the job market is still far from normal. In addition, the last three-quarters lending in the US has improved. Ben Bernanke reiterated that he stayed cautious on the economy and said the recovery was uneven and modest.

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