Thanks to mediocre growth and creeping disinflation, Nomura is calling for QE3 next year…
When accompanied by low and, in our forecast, falling “core” inflation this means the Federal Open Market Committee (FOMC) will be failing to fulfil both parts of its dual mandate. Consequently, we believe that by the end of the first half of 2012, the FOMC will announce further measures aimed at expanding the size of its balance sheet with the focus likely to be on mortgage-backed securities. By the end of 2012, we expect the Fed’s portfolio to increase from $2.64tn currently to $3tn. Our base case scenario is that “Operation Twist” is completed in June 2012, as announced in September, and the asset purchase program begins at the start of July. As with the other “unconventional” actions that the Fed has had to undertake, this additional accommodation is likely to be of limited effectiveness. But for impatient policymakers, inaction is not an option.
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