With the economy seemingly on solid footing, the case for QE3 is weakening, right?Not so fast. According to Nomura, it still comes more down to inflation (or disinflation) rather than growth.
Here’s Nomura’s Lewis Alexander and Ellen Zentner explaining the call…
Increasing confidence that inflation will remain below 2% is central to the FOMC implementing
QE3 soon. Therefore evidence that core inflation is trending higher would force us to reconsider
our call. Recent increases in energy prices are problematic and we will watch carefully to see if
they prove durable and threaten to spill over more broadly. Despite the recent jump in the core
producer price index (PPI), prices at the intermediate goods level – so-called inflation pipeline
pressures – are receding. Anything more than a transient increase
in commodity prices, however, could not be ignored.
We judge the call on additional asset purchases to be less vulnerable to a moderate increase in
the pace of economic activity. Despite recent declines in the unemployment rate, the projected
path is so far above levels the FOMC deems consistent with its mandate that small changes in
the momentum of the US economy should not alter the priorities of monetary policy.
It is worth noting that most of the recent decline in unemployment has been driven by declines in
labour force participation. Over the past five months the unemployment rate has fallen 0.8
percentage points. Declines in the labour force participation rate account for 0.5pp of that decline.
Over that period the rate of employment growth has only just exceeded the rate of growth of the
working age population. Of course, a substantial improvement in our assessment of the
underlying pace of economic activity would change our call on QE3. But such a reassessment
would require stronger data than we have seen to date.
As for consensus, the question seems as mixed as ever. When the Q4 2011 GDP report came out, with sub-par growth, and more signs of disinflation, then the case for QE3 seemed very strong. Since then, things have been better, and at the moment, the majority of economists surveyed by WSJ don’t actually see it coming this year. Still, many on the street do see it either at the next meeting, or the one thereafter.
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