The US Federal Reserve may have no choice but to introduce a third round of quantitative easing, or QE3, in light of the significant headwinds facing the global economy as well as problems at home, Stephen Pope, Managing Partner at Spotlight Ideas said.
“The plight of several US states is becoming serious,” he said.
“California is not likely to reduce the double digit level of unemployment it currently endures and the “Golden State” is said to carry a budget deficit of $25 billion by the end of the second quarter of 2012. State pension programs are pushing the state close to the brink and yet the administration of Governor Jerry Brown appears, bar a state hiring freeze, to do nothing to address the issue,” he said.
The Federal Open Market Committee will struggle to find a consensus to open the door to a third round of easing, Pope wrote in a research note.
Some members will argue that ongoing stimulus will create inflationary pressures, while others will argue that mounting state debt could lead to another crisis if there is no third round of easing.
But “We at Spotlight do seriously think that QE3 may well be an unavoidable fact of life,” Pope said.
He noted that while Fed Chairman Ben Bernanke has said that he sees rising oil prices only causing a slight, short duration rise in consumer inflation, he has also pointed out that turmoil that led to a prolonged surge in oil prices could pose a danger to the recovery.
For that reason he would not rule out “QE3”, Pope said.