A Close Eye On The Fed

When taken off life-support systems the patient begins to sink.” That analogy appropriately describes the health of the US economy. A slowdown happened after QE1 (the first quantitative easing programme) ended and it is happening again now as QE2 draws to a close (Q1 2011 GDP growth decelerated to 1.8 per cent, compared to 3.1 per cent in Q4 2010). Fed chairman Ben Bernanke has admitted to the worsening health of the economy. As economists scale down their GDP projections for the year, a debate has broken out in the US over whether there is a need to launch a third edition of the quantitative easing (QE3) programme. No, they won’t One point of view is that the US economy’s slowdown is temporary, caused by disruptions in supply chains emanating from Japan, which led to suspension of operations in many factories. Since the slowdown is temporary, there will be no need for further support in the form of QE3 and the economy will start growing at a faster pace of its own accord. The political climate today also does not favour QE3. The recession has ended and what the US now faces is a slow-growth scenario. When the situation was dire, support for the quantitative easing programmes was near unanimous (for lack of alternatives). But now questions are being raised about their efficacy: were they useful or did they just bring temporary relief and hence are not worth all the dollars spent on them? A viewpoint has gained ground (and rightly so) that the liquidity-injection programmes, instead of encouraging corporates and households to spend more, merely led to funds leaking out to emerging market e

This article was originally published on July 23, 2011.