QE3 on the Horizon, with Ominous Consequences for Eurozone Periphery
Oxford Analytica predicts another round of quantitative easing by the Federal Reserve when the current program is set to come to an end next month.
U.S. Federal Reserve Chairman Ben Bernanke has stated explicitly that the Fed will conclude its quantitative easing (QE) program in June. However, an extension is increasingly likely, which would have global consequences.
- QE3 would provide a further lift to equity markets and support or minimise a downward correction in commodity prices.
- Fixed-income securities, though underperforming equities, would not suffer as badly as might be suggested in market commentary.
- QE3 would be bullish for global growth — with the key exception of euro-area periphery economies.
The US Federal Reserve is underachieving both planks of its mandate to maximise employment consistent with price stability. The former amounts to an unemployment rate consistent with non-inflationary growth. The price-stability mandate translates into an informal 2% inflation target.
Although the Fed no longer tracks higher-level measures of the broadest conception of the supply of ‘money’ in the economy, private-sector and academic gauges of such notions indicate a collapse. This means that QE3 is positive for sustaining US and global equities valuations, because it maintains a channel of liquidity that otherwise would begin draining from the economy. This also makes it positive for global commodity prices, either sustaining their already lofty valuations or at least cushioning the extent of any broad downward correction.
CONCLUSION: The danger of QE3 would be for the euro-area periphery. So far, reductions in real-effective exchange rates needed in these economies (in other words, their rise in ‘competitiveness’) has been achieved largely through a fitful depreciation in the euro. QE3 would reverse this process, sending the euro stronger from the second half of 2011. Dismal growth in the euro-area periphery thus looks set to deteriorate even further. With QE3, the likelihood of resolving these economies’ indebtedness without a major restructuring looks bleaker than ever.
For the full analysis see: INTERNATIONAL/US: QE3 is on the horizon (Premium)
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