Despite weak economic data that hit the newswires daily in the United States and abroad, the Federal Reserve is unlikely to roll out a third round of quantitative easing, says Mohamed El-Erian, co-head of Pimco, the world’s largest bond fund.
The Fed this month is due to end a second round of quantitative easing, a $600 billion bond buyback known widely as QE2, but a QE3 should remain forever on the drawing board because the detriments of pumping more money into the economy would outweigh the benefits, says El-Erian, according to CNBC.
While quantitative easing inflates stock prices and creates a wealth effect designed to prompt companies to sell stock and raise money to finance job-creating projects, it also weakens the dollar.
Furthermore, all that liquidity also finds its way into markets overseas, which strengthens currencies and creates assets bubbles elsewhere in the world.
“As a result, the global economy becomes like a car that is being driven with one foot on the accelerator and the other on the brake,” El-Erian says.
“Put all this together and the conclusion is clear: It is unlikely that there will be a QE3; and if there is, more time will be spent dealing with the costs and risks, as opposed to the benefits.”
Others see no benefits at all through a QE3.
“We become excessively bearish if the Fed goes to QE3,” Oppenheimer strategist Brian Belski tells Bloomberg Television.
“We think that only prolongs the inevitable when the Fed has to eventually sell these securities that they have been buying.”
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