Major Economic Indicators Are Still Not Strong Enough for QE3 To Be Scaled Back

The US Federal Open Market Committee (FOMC) has confirmed its readiness to continue the third round of quantitative easing as planned. Thus, it will continue to buy government bonds and mortgage-backed securities in the amount of $ 85bn per month, and the key interest rate will stay in the interval of 0–0.25% per annum.

Towards the end of 2013, the ongoing discussions as to whether or not the third round of quantitative easing (QE3) was going to be scaled back became more intense. That this issue is the focus of interest is quite understandable because investors are expecting the traditional year-end rally. This is by no means a trite question, as the stock market since the year’s beginning has jumped up 20%, and investors are by no means reluctant to get an additional bonus in the first three weeks of December.

Currently, practically all the members of the US Federal Reserve Board are for the continuation of the quantitative easing policy. The situation in the US national economy is progressively improving. At the same time, unemployment does not decline, and its rate is at present above its target level of 7%. However, the inflation rate is significantly below its target of 2%, which means that the Federal Reserve System (FRS) has a strong potential for promotional measures.

There is yet another argument against the probability of QE3 being halted in the nearest future. Mr Ben S. Bernanke’s second term as Chairman of the Board of Governors of the FRS will end next year, which means that no key decisions are going to be made in December 2013. To do otherwise would have been an incorrect tactic in regard of the next Chairman, to come to the post in January. Of course, the Board of Governors cannot be expected to introduce any cardinal measures at its very first or second meeting, as it will be necessary to sustain the continuity of the FRS policy and positive investor outlooks on the US stock market.

So, no significant signs of an impending halt of QE3 can be noted yet; besides, such a decision would not appear to be well-substantiated even from the point of view of good tactics. My prediction is that, until Q1 2014, no changes can be expected. At the same time, the project will inevitably be curbed, but this will be done publicly and in a well-organized manner.

A.L. Vedev - Director of the Structural Research Center