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Real Time Insight

Federal Reserve Chairman testified before the Senate Banking Committee yesterday and delivered the same testimony today before the Committee on Financial Services today.

The markets were expecting the Chairman to offer some clues on whether the Fed is going to launch the third round of quantitative easing soon. Those looking for clues were certainly disappointed as Mr. Bernanke offered no hints on what the Fed might do to help the economy.

He delivered a bleak view of the economy and said that he saw “further weakness ahead”.

He reiterated that the Fed was prepared to act if the labor market does not improve but added that “we haven't really come to a specific choice at this point”.

The Fed chairman maintained that the first two rounds did help the economy but he would like to see “other parts of the government play their roles”.

In the last few days, we have had some excellent posts/comments here about the effectiveness of further QE. Of late, some of the Fed members have also raised concerns that long-term easing actions may distort the financial markets.

However, we have to agree with Ben Bernanke that the economy would have been in much worse shape without the massive measures (including some unorthodox) taken by the Fed since 2008.

An analysis conducted by the San Francisco Fed suggests that unemployment would be lower by 1.5% and GDP would be higher by almost 3% by 2H 2012 than it would have been in absence of the asset purchase program i.e. the program prevented the US economy from falling into deflation.

The markets have however remained resilient, despite no hint of QE. It appears that many people now believe that QE3 is definitely coming; only the timing is unknown.  According to Goldman Sachs, the Fed may ease after their meeting in August or September, followed by a larger easing action after the election.

Fed’s next policy meeting is on July 31 and August 1. After that, they meet on September 12 and 13, when they will update their economic forecasts and the Chairman will also hold a press conference after the meeting.

Do you believe that the Fed will announce some easing measure in August or September and that an easing move is already priced in by the market? 

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