Bernanke Not Ready for More Money Printing, Yet: Economist

There was no guidance on the end of the second round of quantitative easing or QE2 and no guidance on the chance of QE3, but Federal Reserve Chairman Ben Bernanke on Tuesday confirmed market expectations that the United States' borrowing costs will remain low for the foreseeable future.

Fed Chief Ben Bernanke Testifies to House Budget Committee
Fed Chief Ben Bernanke Testifies to House Budget Committee

On Thursday the boss of the European Central Bank is expected to do the exact opposite and indicate rates will rise this year as he grapples with fears over inflationary pressures. The move could see foreign exchange traders buying the single currency despite problems in Greece, Ireland and Portugal.

Dollar weakness would be accelerated if Bernanke and the FOMC (Federal Open Market Committe) decided to extend QE2 or adopt new measures, but one economist believes there are three good reasons this will not be the case.

“There are three reasons why we doubt that the Fed would be willing to countenance a new program of large-scale asset purchases, at least not this year,” said Paul Ashworth, the chief US economist at Capital Economics in a note to clients.

The first is the possibility that the recent slowdown is due to temporary factors such as the surge in commodity prices and Japanese earthquake supply disruptions

“Bernanke admitted that the economic recovery had recently suffered a 'loss of momentum' but he still expects growth to pick up again. He gave no hint of more quantitative easing and even admitted that 'monetary policy cannot be a panacea'," said Ashworth.

With the risks of inflation larger than the risk of deflation following QE2, Ashworth said one of Bernanke’s key drivers for pulling the trigger on a third round of quantitative easing has been removed.

“Deflation is no longer the imminent danger it appeared to be late last year,” he said.

Finally the costs of QE2 could now be seen to outweigh the benefits of QE2 in Ashworth’s view.

“With QE2 having had little downward impact on long-term interest rates and possibly contributing to the surge in commodity prices, Fed officials may well conclude that the benefits of quantitative easing no longer outweigh the costs,” he said.

“While we think there is little chance we will see an additional program of QE being announced in the next few months, we wouldn't entirely rule out the possibility over a longer time period” he added.

“In particular, the Fed might be more tempted to ease monetary policy next year in order to offset some of what Bernanke warned could be 'an increasing fiscal drag on the recovery'," said Ashworth.