MacroScope

Five reasons why the Fed would prefer to avoid QE3

April 19, 2012

The Fed appears to have moved away from the notion of additional bond purchases in recent weeks, for a  mix of tactical and practical reasons including:

1. Policymakers worry about venturing any further into uncharted territory.

2. Growth isn’t weak enough to make a clear case for additional monetary easing.

3. Many officials think QE is better at thwarting deflation than boosting employment.

4. Cutting rates before a presidential election is probably not ideal timing.

5. Bernanke would like to save the Fed’s remaining ammunition for a truly rainy day.

And yet 11 of 15 primary dealers polled by Reuters following a disappointing March payrolls report still believe the central bank will ultimately embark on another bond-buying stimulus plan. Given the Fed’s rather high bar for further asset purchases, that must mean these banks expect the economic backdrop to get materially worse from here.

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