Fed May Dangle QE3 Carrot, but Few Expect Further Easing

The markets may be hoping the Federal Reserve will signal further easing at the end of its policy meeting, but experts tell CNBC, Fed Chief Ben Bernanke is unlikely to follow through with more easing. Rather, some economists say, rates are headed higher before the end of 2014.

Wednesday's event marks the first regularly scheduled news conference by a Fed chairman in the central bank's 97-year history.
Wednesday's event marks the first regularly scheduled news conference by a Fed chairman in the central bank's 97-year history.

“(Bernanke's) objective is to dangle the carrot of QE3 in front of us to make the curve as flat a possible to help sustain the recovery of the U.S.," Societe Generale's Senior Currency Strategist Sebastien Galy told CNBC Asia's "Squawk Box" on Wednesday. "I don't think the FOMC is going to do much. I think people are excited about the prospect of QE3 because they like their drug."

Investors will be looking out for the Federal Reserve's comments on "Operation Twist," a $400-billion program expected to end in June, and whether policymakers will extend the program. Under Twist, the Fed purchases longer-dated Treasurys and sells the same amount of shorter dated securities, so that it can drive down rates.

Diane Swonk, Chief Economist and Senior Managing Director at Mesirow Financial, does not expect the program to be extended.

"I think they're going to let the twist expire for now because frankly Europe's doing it for them, they don't need to do the Twist to keep interest rates on the long end low," she said.

In the latest CNBC Fed Survey, just a third of 53 economists, fund managers, and strategists said they expected additional quantitative easing from the Fed and just a quarter expect Operation Twist to be extended.

Galy says the Fed will ease policy if the economy worsens. But Ilian Mihov, deputy dean of the INSEAD business school said on CNBC Asia’s "Squawk Box" he doesn’t expect further easing, rather he expects rates to be raised earlier than the Fed’s target of end-2014.

“For the past 2, 3, 4 years, we have been completely ignoring money supply because there is no sign of inflation, there is deflation and so on,” Mihov said.

"I don't think there'll be QE3. To the contrary, if you look at the past 20, 30, 40 years, whenever M1 (money supply) starts growing at double-digit numbers, a year later, interest rates go up."

M-3, one of the broadest measures of money available in the U.S. economy, grew at a 5.8 per cent rate during the 12 months ending in March, the Federal Reserve said earlier this month. M-1 and M-2, indicators of the amount of money in circulation, are growing at 17.4 per cent and 9.8 per cent, respectively.

A Fed rate hike next year was “debatable,” Swonk said, but she said a rate hike before the end of 2014 was probable.

According to her, the Fed is walking a fine line in trying to convince the market it would provide cheap money for a long-time to spur investments, while also facing a liquidity trap brought on by ultra-low interest rates.