Fed’s QE3 hints spark market opposition

America’s Federal Reserve has hinted that it could launch a third round of quantitative easing (QE) to boost economic growth. But not all commentators are convinced that injecting more money into the system will help.

The minutes of the Fed’s Federal Open Market Committee (FOMC) meeting on November 1-2 reveal that several of the central bank’s policymakers ­recommended that further monetary easing should be considered.

“However, it was noted that any such accommodation would likely be more effective if it were provided in the context of a future communications initiative,” the minutes explain. This suggests that QE3 would be unveiled as part of a campaign to ensure that the financial markets’ expectation of the programme aligns with the bank’s. (article continues below)

“Most” members of the committee agreed to maintain the Fed’s present monetary policy for the time being, the minutes report, although one member dissented and argued that further easing was “warranted at this time”.

The last QE programme ended in the second quarter of 2011, after the Fed bought $600 billion of Treasury securities.

At its meeting, the FOMC lowered its growth forecast for the American economy, cutting the projection for 2012 from between 3.3% and 3.7% to 2.5% to 2.9%.

The committee also expressed concern over high unemployment and the weak housing market.

Last week the the Bureau of Economic Analysis added weight to the likelihood of QE3 being introduced by revising down its third-quarter growth estimate to 2% from a previous 2.5%.

However, Peter Lawery, a co-manager of the Jupiter Merlin funds of funds range, says another round of easing is likely to do more damage than good. Although he accepts that the first round was necessary to bolster confidence, he considers QE2 a “disaster”.

The manager argues that more easing would inject “a significant inflation problem” into the American economy and ultimately damage growth by making it more expensive for domestic manufacturers to produce goods.

“QE3 probably isn’t the answer to all our problems,” Lowery warns. “If QE3 is brought in, [we will have] a temporary ’sugar rush’ for investment markets, but it will not help the long-term health of the economy.”