Twice in the last week, rumors surfaced that Ben Bernanke was considering a third round of quantitative easing, first in the Fed minutes, and then in Wednesday’s congressional testimony. The risk markets rallied furiously, and then quickly gave it all back.
If I have been asked one question more than any other this year, it is whether there will be a QE3. My answer remains the same: No, not on your life, not a snowball’s chance in hell. My reasons are legion.
For a start, with the economy growing at a feeble, lethargic 2% rate, there is just enough growth to make QE3 unnecessary. All of the liquidity injected into the system by QE 1 & 2 is still there, but has yet to be used. It is the “pushing on a string” theory with a turbocharger. That is why the Fed’s balance sheet remains at a lofty $2.8 trillion. Bernanke has to wait for the existing liquidity to be put to work before he contemplates the creation of any more.
The political environment in Washington does not auger well for an additional measures to stimulate the economy. While Bernanke is thankfully independent of the congress and the president, he is not an idiot. In any case, there are a dozen additional tools the Fed can put to work to help the economy, which we will only hear about after the fact.
There are many more things that the administration can do as well. Witness the International Energy Agency’s recent attempt to manipulate the price of oil down with its release of stockpiles. A mere $10 drop in crude is worth an entire tax cut in terms of its impact on the global economy. Expect many more of these to come.
I think at some point in the future we will see the son of quantitative easing. But not until we are plunging into the next recession in 2012 or 2013 at the latest. Then they will call it by another name. So QE3 is well and truly dead. Please stop asking the question.