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Fed Could Anger Creditors, Tea Party With 'QE3'

This time last year, Federal Reserve Chairman Ben Bernanke used a speech in Jackson Hole, Wyoming to hint that he was about to unleash a second round of unconventional measures to get more monetary liquidity into domestic the economy.

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The comments sparked a stampede among investors into risky assets, but following QE2’s failure to kick-start the US economy, analysts are now questioning whether another round quantitative easing will even manage to boost prices for risky assets.

“We do not generally expect to see such strong reactions in the financial markets as those that QE has elicited in the past,” John Higgins, a senior markets economist at Capital Economics, said in a research note.

Having watched the first and second rounds of quantitative easing succeed in boosting riskier assets such as stocks and commodities, Higgins believes risk premiums are now far lower than in 2009 and 2010, which will limit the ability of the Fed to increase risk appetite. As for the economy, it would take something far bigger than past measures to boost growth, according to Higgins.

“There is little reason to expect (the economy) to warm in the event of QE3," he said, "unless the Fedacted much more boldly than it has in the past.”

With doubts over the effectiveness of quantitative easing at even boosting asset prices, let alone the economy, U.S. political opposition to yet more stimulus from the Fed could see those hoping for QE3 disappointed.

Though Rick Perry, the Texas governor, was scolded for not sounding presidential when he said it, the White House hopeful was speaking directly to the Tea Party movement when he said that if Bernanke prints more money, he should be charged with treason.

Conservative opposition to QE3 does mean that the Federal Open Market Committee , which is divided on the issue anyway, will think twice before pulling the trigger for a third time. Opposition by foreign creditors factors in as well.

Joe Biden, the US vice-president, told the Chinese last week that their money was safe with the American Treasury .

"It's particularly important that you sent a very clear message to the Chinese public that the United States will keep its word and its obligations with regard to its government debt, it will preserve the safety, liquidity and value of US Treasurys, ” Biden said in Beijing.

Brazil would also be concerned about the prospect of more QE from the Fed, given the sharp rises in the Brazilian real following QE1 and QE2. Talk of currency wars would be immediately re-ignited if the Fed does indicate it will act.

One analyst believes the Fed could be about to make a major mistake.

If QE3 comes as a de facto redux of QE2, then this will I feel be a major policy error,” Bob Janjuah, co-head of cross-asset allocation strategy at Nomura, said on Tuesday.

“It may help markets for few short weeks, but in reality such QE3 will force emerging markets to slow down even harder as such a form of QE3 will simply reignite food and energy price inflation for emerging markets," he said. “And for the West such QE3 will simply act as an even bigger de facto tax on the Western consumer."

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