Might the Federal Reserve extend its bond purchases beyond June? What until this week was a pie-in-the-sky notion is suddenly fair game for market speculation.
The triggers have been many.
The latest one-two punch came from reports on Wednesday showing both a sharp deceleration in private sector hiring and a slowdown in manufacturing.
Compounded with weakness from China and Europe, the news was enough to knock stock prices -- a key beneficiary of the Fed's ultra easy policy -- more than 2 percent lower. The Standard & Poor's 500 index suffered its worst day since August.
Most Fed watchers still see a third round of quantitative easing, or QE3, as a very remote possibility. The obstacles this time around are greater, since inflation has been creeping higher and the jobless rate, while still at an elevated 9 percent, has come down quite a bit in recent months.
"It's highly unlikely, but never say never," said Jim O'Sullivan, chief economist at MF Global.
The Fed would also prefer to avoid reliving the domestic and international furor its second round of bond buys unleashed. Though Fed officials would rather not admit it, the criticism has weighed on their decision-making.
When the central bank embarked on the $600 billion round of Treasury bond buys, Republican politicians, some economists, and even a couple of top Fed officials cautioned that the measure, aimed at keeping borrowing costs down and stimulating the economy, would not work and risked sparking inflation.
Policymakers in emerging economies, for their part, argued the measures were a thinly veiled effort to weaken the dollar and boost U.S. exports at their expense. They bemoaned the rise in currency values and capital inflows that ensued.
Source: www.reuters.com
Ravi Jhawar
Summer Intern-Technical Analyst
DENIP Consultants Pvt. Ltd.
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