Newsroom
June 23, 2013
Carrier: When will the Fed end QE3?
June 24, 2013 – Based on last week's news reports, it's difficult to say just when and how the Federal Reserve may begin to taper its current round of quantitative easing, but NAFCU Chief Economist David Carrier said the Fed is likely to follow its stated policy.
Carrier holds to the view that the Fed is likely to extend QE3 "for the foreseeable future."
As it has been doing for previous meetings of the Federal Open Market Committee, the Fed last week issued a policy statement that said there will have to be substantial improvement in the labor market before there is any tapering of QE3. The key question, Carrier said, is how the Fed defines "substantial improvement."
"The answer depends on whether the economy will track the Fed's forecast," he said. "Historically, it has not. Every forecast has been too optimistic, and they have had to revise it every time they issue it."
The Fed currently expects 7.2 percent unemployment by the end of this year, and Bernanke's comments in a press conference last week merely reflect that expectation. What isn't known is what the Fed will do if conditions don't match that forecast.
Added to this are the more recent remarks by St. Louis Fed President James Bullard, who is now airing his own concerns about deflation. The Fed's inflation target, measured by the personal consumption expenditures deflator, is 2 percent. The PCE deflator is currently at 1.05 percent, well below the Fed's comfort level.
"Bernanke didn't say exactly when they will start tapering asset purchases," Carrier noted. "He said tapering might begin later this year, but only if unemployment reaches the Fed's forecast of 7.2 percent."
Bullard has weighed in to say the decision to ease QE3 should be based solely on economic conditions. Carrier added that "within the context of the emerging fiscal drag and ongoing weaknesses in the global economy, there is a risk that the Fed's current forecast may still be too optimistic. The Fed is more likely to continue QE3 until economic conditions improve substantially, in order to avoid having to backtrack later."
Carrier holds to the view that the Fed is likely to extend QE3 "for the foreseeable future."
As it has been doing for previous meetings of the Federal Open Market Committee, the Fed last week issued a policy statement that said there will have to be substantial improvement in the labor market before there is any tapering of QE3. The key question, Carrier said, is how the Fed defines "substantial improvement."
"The answer depends on whether the economy will track the Fed's forecast," he said. "Historically, it has not. Every forecast has been too optimistic, and they have had to revise it every time they issue it."
The Fed currently expects 7.2 percent unemployment by the end of this year, and Bernanke's comments in a press conference last week merely reflect that expectation. What isn't known is what the Fed will do if conditions don't match that forecast.
Added to this are the more recent remarks by St. Louis Fed President James Bullard, who is now airing his own concerns about deflation. The Fed's inflation target, measured by the personal consumption expenditures deflator, is 2 percent. The PCE deflator is currently at 1.05 percent, well below the Fed's comfort level.
"Bernanke didn't say exactly when they will start tapering asset purchases," Carrier noted. "He said tapering might begin later this year, but only if unemployment reaches the Fed's forecast of 7.2 percent."
Bullard has weighed in to say the decision to ease QE3 should be based solely on economic conditions. Carrier added that "within the context of the emerging fiscal drag and ongoing weaknesses in the global economy, there is a risk that the Fed's current forecast may still be too optimistic. The Fed is more likely to continue QE3 until economic conditions improve substantially, in order to avoid having to backtrack later."
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