By: Christopher Lewis
After the Tuesday release of the Federal Reserve minutes the trading world is weighing the possibility of another round of quantitative easing in the United States. The Federal Reserve Chairman Ben Bernanke stated that he is concerned that the crisis in the European Union could cripple the 2 ½ year expansion the US has seen, and that the fragile recovery may need more help from the central bank.
While the Fed didn’t explicitly mention any new measures, the statement said that the economy in American “has been expanding moderately”, instead of the statement released in November that said growth in the US has “strengthened somewhat”. Other parts of the release said that the “strains in the global financial markets continue to pose significant downside risks to the economic outlook.” This suggests that perhaps the situation in Europe will ultimately determine whether or not the Federal Reserve will act at all. Left on its own, the US economy could possibly avoid any need for additional stimulus.
The next meeting for the Federal Reserve members takes place January 25 – 26, and at that point they could unveil new measures. The joblessness rate is expected to drop only gradually, and as long as that is the situation, there will always be a chance that the Fed will act in some manner during the meeting.
There are still plenty of downside risks out there, and as a result many traders think they are more inclined towards a policy of continued easing. The continuation of an asset purchase program could be the next move, perhaps buying even more mortgages than they have already. At this point in time, the Federal Reserve is the largest holder of housing-related mortgages in the United States.
While the economic picture in the United States remains stable, it is also fragile. If the economic conditions in Europe lead to another round of credit crunches, the economy in the United States could very well end up being hurt as well. In this very tentative environment, Mr. Bernanke has shown in the past that he will not hesitate to ease. With this in mind, QE3 could be coming early in 2012.