If all goes as per plan, the US Fed's pump priming activities are not likely to extend beyond the month of June. In other words, the Fed will stop short of Quantitative Easing Version 3.0.
Business week reported late yesterday that the Federal Reserve officials have signalled they are unlikely to expand the current US$ 600 bn bond purchase plan. Quite an important announcement we should say.
Quantitative Easing or QEs as they are popularly called were actions undertaken by the US Fed to prevent the US economy from going into a depression. And also to keep asset prices from falling. The Fed is now of the belief that the economy is on a firmer footing. Besides, the threat that inflation will fall too low has also begun to wane. In view of this, it makes sense not to go for another round of QE and unnecessarily strengthen the risk of runaway inflation.
Is the assessment of the US Fed correct? We do not think so. Firstly, the chief indicator of an improving economy is the job market. And here, things have improved only marginally at best. And that too after pumping in dollars to the tune of trillions.
Secondly, the Fed seems to be of the view that the US economy is now capable of growing on its own as the private sector and private spending will take over from the Government sector. That assumption could well turn out to be incorrect. What if the Fed withdraws the support and stops the QE and the economy once again begins to falter? In such a scenario, the Fed will be forced to keep the QE tap running full throttle and who knows, QE3 and even QE4 could be contemplated.
Thus, we believe that it is a little premature to celebrate. Hoping that all the problems in the west have ended and it is back to the era of strong, sustainable growth could be a recipe for disaster we believe. Infact, all the money injected into the system by way of QE1 and QE2 is yet to show its full effects. We are of the view that this money by itself can cause tremendous problems. Its magnitude is big enough to induce a strong inflationary wave into the economy. We certainly do not know which glasses the US Fed is wearing. But the way we see it, problems in the west are far from over.