Wednesday, August 10, 2011

Fed forced to consider fresh stimulus: Is QE3 coming?

The US Federal Reserve’s meeting on Tuesday is likely to be one of its most difficult and divisive since, well, last August.

Sharply weaker economic data in recent weeks, a new peak in the eurozone debt crisis, and a downgrade to the triple A credit rating of the US have shaken confidence in a way that could spiral towards a new recession. The Fed will be forced to consider fresh stimulus in response.

But, despite those recent shocks, Fed policymakers still have reasons to think that growth should pick up later in the year. Oil prices are now about $25 a barrel below their springtime peak; supply chain disruption from the Japanese tsunami should fade; and, unlike last summer, inflation is close to target and has been rising, not falling.

On the one hand will be an argument that, with markets desperate for succour, to do nothing would make a bad situation worse. On the other will be deep reluctance – and not only by policymakers who have long opposed more stimulus – to make monetary decisions that take a year or two to affect the economy in response to a market swoon. (more)