Currently there is a big debate going on regarding whether QE3 will happen or not. We are in the camp expecting QE3 to happen. Here are some reasons behind our expectations:
1) Inflation: During 2nd half of 2011, inflation had soared to high levels and was becoming a major concern. Under those circumstances it was very tough to do QE3 as that would have been like putting fuel to fire. But now that threat has vanished substantially. Inflation has cooled down a lot from those levels and is below the Fed’s mandated 2% level. So with inflation no longer a concern, there would be much less opposition to a QE3.
2) US Dollar: In summer of 2011, the Dollar Index had gone down to 73-74 levels. QE3 would have pushed this down further and this devaluation of US Dollar could have led to harmful consequences for the economy, including inflation (although it would have helped exports, but negatives would have outweighed any benefits). Now this Index is at relatively healthy level of 79-80, and some may say it is too healthy. A drop from this level would not be considered harmful for the US economy.
3) Politics: Last, but perhaps the most important, is the politics. We are less than 9 months away from the Presidential elections. Already signs of improving economy are said to be helping the incumbent President. Although the effect of QE3 may not be as large as of QE1 and QE2, it will definitely provide a boost to the markets, which are a big part of how citizens measure the health of economy. So naturally the American mood will be much more brighter regarding economy, and that would further help the incumbent administration. Remember, economy is the number one issue right now in American minds, and is also the main case that the opposition is trying to make against the President – of mishandling the economy. However, if economy is considered much more healthier in few months from now, than tables would be turned.
So overall, the decision makers may very well think that there is much more to gain from QE3, and under the current circumstances potential negative impact is limited. There is much that can change between now and when decision is made that can alter this scenario, but right now the odds seem to be in favor of QE3 happening.