Here Comes QE3

Photograph by Zhang Jun/Xinhua/Corbis

Federal Reserve Chairman Ben Bernanke testifies before the Joint Economic Committee about the Economic Outlook on Capitol Hill.

A majority of economists believe the Federal Reserve is poised to boost stimulus tomorrow, according to a Bloomberg Survey of 73 economists.

Sixty-four percent say the Fed is going to launch a bond-buying program at the conclusion of its meeting today and tomorrow in Washington. Sixty-eight percent say the Fed will extend its pledge to hold interest rates near zero into 2015 from its current target of late 2014.

Fed Chairman Ben S. Bernanke said in his Aug. 31 speech in Jackson Hole, Wyoming that he believes buying bonds — a strategy known as QE, for quantitative easing — is effective at boosting employment and that the risks are small. The first two rounds helped create 2 million jobs, he said.

Under QE programs, the Fed creates reserves in the banking system and uses them to buy bonds. Economists don’t agree on the form this new program will take.

One option, expected by 44 percent of economists, is for the Fed to announce an open-ended program where it perhaps announces a monthly pace of purchases that will continue until the central bank is happier with the economy.

The other option, expected by 30 percent of economists, is for the Fed to announce a lump-sum of purchases, perhaps $700 billon to be completed by a certain date. This was the format of the Fed’s second QE program, announced in November 2010, to buy $600 billion of Treasuries by the end of 2011.

Most economists agree that either way, the Fed will be buying both Treasuries and mortgage-backed securities.

The Standard & Poor’s 500 Index has risen 4.6 percent since the start of August and is near the highest levels in four years on expectations the Fed will act.

That suggests QE3 may draw the same sort of political reaction as QE2. While markets welcomed the boost QE2 gave to asset prices, the program drew sharp criticism from Republicans as commodity prices climbed and the dollar fell.

Republican Congressional leaders John Boehner of Ohio, Eric Cantor of Virginia, Mitch McConnell of Kentucky and Jon Kyl of Arizona sent Bernanke a letter in November saying that the program “introduces significant uncertainty regarding the future strength of the dollar.” Republican presidential candidate Mitt Romney has said he won’t reappoint Bernanke.

As QE2 ran its course, commodity prices receded, the dollar strengthened in the second half of 2011, and the rate of consumer-price increases tapered off, vindicating Bernanke’s predictions that QE would not lead to lasting inflation or a decline in the dollar.

Yet that doesn’t mean the debate won’t repeat.

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