WASHINGTON | Fri Feb 18, 2011 8:12am EST
Set to be completed at the end of the second quarter, the Fed's bond-buying program appears to have had a positive effect on stock prices. Still, economists disagree about the likely impact on economic growth.
Janet Yellen, the Fed's influential vice chair, has argued that the latest round purchases will translate into 700,000 new jobs, with the entire $2.3 trillion asset purchase program contributing to the creation of as many as 3 million jobs.
Private sector economists are more conservative. Lawrence Meyer, a former Fed governor now at the consultancy Macroeconomic Advisors, believes Fed asset buys raised the level of gross domestic product by between 1.5-3 percentage points over eight quarters. That, he says, would be consistent with new jobs for between 1.5 million and 3 million Americans.
That effect is hardly unsubstantial, and begs the question of why the central bank would be reluctant to do more.
One possible answer could be timing. The Fed has little to gain by jumping the gun and talking about future measures when it has yet to reach the halfway-mark for its existing bond-buying commitments.
"It's just too soon to get into that discussion," said Steve Blitz, senior economist at ITG. "And to say that you're going to need to do it again, you're sort of saying it's not working. So I think they'd rather wait till they meet in May to discuss in earnest what they are going to do."
Still, if the committee envisions the need for further measures, they might like to begin laying the groundwork for it sooner rather than later. QE2 was widely telegraphed to financial markets months before it was put into place.
Another explanation for any delay of QE3 talk is recent concern in financial markets about the possibility that the Fed might be exposed to losses on its massive bond portfolio, something that could make it even more vulnerable to political intervention.
Joseph Gagnon, a former Fed economist now at the Peterson Institute for International Economics refers to this as a worry about the "delayed political consequences from the risk of future losses on their balance sheet."
He says that if the Fed were to strictly follow its implicit target for inflation of 2 percent or a bit below, it should be doing more, not less.
"All measures of core inflation are at record lows and that is what they focus on," Gagnon said.
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