Tags: Reinhart | Fed | easing | us

Morgan Stanley’s Reinhart: Fed to Unnecessarily Roll Out QE3

Thursday, 08 March 2012 08:24 AM

The Federal Reserve will likely roll out a third round of quantitative easing (QE3), bond purchases from banks designed to jolt the economy, even though less intense measures would do the trick, says Morgan Stanley Chief U.S. Economist Vince Reinhart.

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 central bank snap up $600 billion of Treasury bonds, the latter of which wrapped up on June 30, 2011.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Such moves are used to stimulate the economy when interest-rate cuts don't work, and as a side effect, inflationary pressures mount.

According to Reinhardt, all the Fed needs to do is reshuffle its existing bond holdings, a move dubbed by the markets as Operation Twist, under which the Fed sells short-term bonds and buys up longer-term securities with the aim of keeping long-term interest rates low while not swelling its balance sheet larger than it already is.

Nevertheless, the more-intense QE3 is on the way.

Should the economy need it later in the year, it won't be politically doable so close to the presidential elections.

"The political calendar makes it likely that the Fed will want to keep a low profile in the second half of the year's campaign season. If the window for a policy move closes by June, the hurdle for action is lower before then," Reinhart writes in a report.

"Second, economic slack persists and inflation is running below the Fed goal in its medium-term projection. The dual shortfall from its mandate provides both justification and political cover for action."

High oil could slow the economy as well.

"Thus, the recent rise in oil prices and the risk that they go higher likely inclines the Fed to do more, not less," Reinhart concludes.

The government is due to release its February jobs report soon, and better-than-expected unemployment figures could send expectations of QE3 waning.

"Bernanke has not mentioned QE3, that tells me the thinking is now data driven. The more good economic data we get, the more less likely QE3 becomes," says Jerry Webman, chief economist at OppenheimerFunds in New York, according to Reuters.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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