QE3 remains on hold

Fri, 3 Aug Pre-Open

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This Wednesday, when the Federal Open Market Committee (FOMC) sat for the meeting to decide its future monetary policy actions; many economists around the world were expecting the announcement of unconventional monetary actions such as quantitative easing, known as QE3, for the third time. Some experts were looking for change in the timeline from late-2014 to 2015 as far as its low-rate guidance is concerned.

However, nothing significant happened. No policy actions were announced. The Fed maintained position, stating that a subdued outlook for inflation over the medium run are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

But there were significant changes in the policy statement made by FOMC. In its earlier statement, the committee took the view that the US economy has been expanding moderately during the year 2012. However, this time, they have accepted that economic activity decelerated somewhat over the first half of this year. However, from the no policy actions, it is very clear that in their view economy is not worsened enough to warrant any urgent action.

Experts are taking this no-action-policy-statement differently. One section is of the view that the committee does not feel that at this point in time, any monetary stimulus would significantly improve the condition of economy in terms of growth rate or employment rate. Others feel that actions would be useful in case of worsening economic situation. In any case, the Fed has kept its door open for policy actions in the future. It did signal for future stimulus action in the statement. It states that the Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

The important point to be noted that the slowing economic growth of the US economy not only affects North America, but it is some way also related to the prevailing crisis situation in the European region. In the absence of any quantitative easing measures, another financial crisis cannot be ruled out. Therefore, it is not only the US but the whole world is looking for QE3 for quite some time.

When the Federal Reserve Chief Dr Ben Bernanke would do this is anybody's guess. But all ears would await his next speech at the central bank's high-profile gathering in Wyoming, sometime in late August.