The Federal Reserve will roll out a third round of quantitative easing — asset purchases from banks — and steer the economy away from a fresh recession, says Goldman Sachs Chief Economist Jan Hatzius.
The Fed, under Chairman Ben Bernanke, has already launched two rounds of quantitative easing, known widely as QE1 and QE2.
QE1 saw the Fed buy $1.7 trillion in assets from banks, mainly mortgage securities, while QE2 saw the monetary authority snap up $600 billion in Treasurys.
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Critics say such policies threaten to push inflation rates up, but Fed officials say they were necessary to avoid deflation.
Get ready for QE3, Hatzius tells Forbes.
"We expect QE3 in six to nine months, probably in a seamless transition from Operation Twist," he says, referring to Operation Twist, another Federal Reserve policy under which the Central Bank shuffles its Treasury holdings around to keep long-term interest rates low.
|Fed Chairman Ben Bernanke
(Getty Images photo)
With QE3 and other loose monetary policies, the U.S. economy should grow 0.5 percent in the first quarter of 2012, narrowly avoiding a recession, Hatzius says.
"It won't be largely effective, but it helps at the margin," Hatzius says, adding that "the idea of monetary easing in response to a weak economy has been the right strategy, and it has been useful."
Federal Reserve officials insist the U.S. will not fall back into economic contraction, including Philadelphia Fed President Charles Plosser.
"Many of my business contacts suggest that while growth is very sluggish and uneven, they do not see the precipitous declines that many news accounts would suggest," Plosser says, reiterating his forecast for 2 percent growth this year and 3 percent in 2012, according to MarketWatch.
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