Will Fed Announce the Death of Quantitative Easing?
Federal Reserve Chairman Ben Bernanke is unlikely to drop a bombshell in the markets like his counterpart at the European Central Bank did when he pre-announced a rate rise, ING chief international economist Rob Carnell wrote in a market note.
However, the Federal Open Market Committee's (FOMC) statement after the March 15 meeting may signal a new phase in discussions and may hint that the second round of quantitative easing (QE2) was a "dead policy walking," Carnell added.
In his speech to Congress on March 1, Bernanke noted that "the risk of deflation has become negligible," and the fear of deflation was "the only motivating factor behind both batches of QE by the Fed," he explained.
The Fed's approach to inflation "seems exceptionally backward looking" but even so they will have to concede soon that the next move in policy will be tightening, not further loosening, Carnell wrote.
"This might seem a small step, but hinting at it in the FOMC statement would require a sizeable overhaul of its current language," he wrote.
One thing that should be replaced in the FOMC statement is the suggestion, in the first paragraph, that measures of "underlying inflation have been trending downward," with the text referring to "stabilization" instead, according to Carnell.
"Similarly, the line about 'longer-term inflation expectations have remained stable' is palpably false right now," he wrote.