Fed will launch ‘QE3’ by fall, expert says

WASHINGTON (MarketWatch) — The weak June nonfarm payrolls report will spur the Federal Reserve to launch a third round of asset purchases, known as quantitative easing, sometime this fall, said David Blanchflower, a professor at Dartmouth College.

“QE3 looks increasingly on the table. What are they going to do, let unemployment start rising again?” Blanchflower said in a telephone interview.

Blanchflower, a former member of the Bank of England’s monetary policy committee, said the current U.S. malaise is a rerun of the England economy earlier this year where talk about government austerity made consumers rein in their spending, and businesses then slammed the brakes on investment and hiring.

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“The sheer talk of austerity pushed down animal spirits and raised markedly the prospects of further QE. How else are you going to get stimulus?” he asked.

Growth in England is very slow and should be a wake-up call in the U.S., he said.

“All the people arguing that fiscal contraction is expansionary are completely off track,” he said.

The Fed sees an economy that still needs negative real interest rates, but they have to push against members of Congress “who don’t understand that raising fears of financial collapse makes things worse,” he said.

The fiscal mess must be sorted out over a much longer time frame because the economy needs some stimulus in the short-term, he added.

The Fed will wait until after the summer to decide how to do a new round of asset purchases and what to say, he said.

The next round of quantitative easing will be similar to the past two rounds because the Fed is extremely limited in what assets it can purchase, he said. The Fed has the authority to buy only Treasurys, mortgage-backed securities or short-term municipal bonds, Blanchflower said.

The Bank of England may launch another round of asset purchases before the Fed.

Other ideas floated as easing steps for the Fed just won’t work, he said.

For instance, having the Fed promise to keep rates low even longer than an extended period “is not very credible,” he said.

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“What that means is ‘we’ll keep rates low until we don’t need to keep rates low,’” he said.

Although interest rates are low, most people can’t get banks to offer them a loan because of their credit ratings, he said.

Blanchflower said the slowdown in the U.S. is due to a weak global economy where retail sales are “in a collapse-mode” and consumers and manufacturing data have been negative.

“The world economy is slowing. Why does everyone think the U.S. is separate from it?” he asked.

Blanchflower criticized the European Central Bank decision to raise interest rates.

There is no wage pressure and inflation is falling. This makes it harder for countries on the periphery.

“It looks like policy makers are doing exactly the wrong things,” he said. 

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