US Federal Reserve set to unveil 'QE2' plan
The US Federal Reserve is expected to unveil plans today to inject billions of dollars into the country’s economy to jump-start its sluggish recovery.
The central bank should reveal the size of a second quantitative easing package - dubbed QE2 – following the conclusion of a meeting of policymakers in Washington DC.
The bank, led by governor Ben Bernanke, has hinted at the prospect of QE2 in recent weeks, with economists expecting as much as $500bn (€356bn) to be pumped into the world’s largest economy.
As the Fed makes its announcement, its counterparts at the Bank of England will be considering whether they too should roll out a second bout of quantitative easing in the UK.
In the first few months of the year, the US economy seemed to be growing strongly, but in the early summer signs that the recovery was slowing down emerged.
Consumer confidence, new home sales and manufacturing performance have been volatile, and despite a flurry of upbeat reports recently, unemployment is still close to 10% and inflation is critically low.
Further quantitative easing – or asset purchases as it is also known – could encourage banks to lend, drive down long-term interest rates and encourage investment, lower the dollar’s exchange rate and stimulate spending.
Amna Asaf, analyst at Capital Economics, said the most likely outcome was a programme of $500bn over the next six months and added the Fed would “make those purchases, and any additional purchases beyond that, conditional on how inflation and the unemployment rate evolve”.
Mark Cliffe, chief economist at ING, said quantitative easing could boost the economy, but also had the potential to damage recovery.
He said the programme could lead to a currency war – as other nations manipulate currencies to compete with the weakened dollar – and could also lead to an unmanageable surge in inflation above target.
Mr Cliffe added: “Much will depend on the Fed’s ability to recognise this and put QE into reverse in a smooth and timely fashion.”
In the UK, the Monetary Policy Committee (MPC) will be considering potential changes to its own stimulus packages at its monthly meeting.
Economists expect the MPC to hold interest rates at their historic low of 0.5% and keep the level of QE at £200bn (€228bn).
Philip Shaw, economist at Investec Securities, said the UK and US were in different situations, and expects no change in policy.
He said above-target inflation and firmer-than-expected UK data, including third quarter GDP growth of 0.8% and a rise in the manufacturing purchasing managers index (PMI) in October, diminished the case for further QE.
But he added: “We would hesitate to rule out further asset purchases at some stage completely if the recovery shows signs of faltering.”
The US Federal Reserve’s announcement is expected at 6.15pm Irish time.
