It has been almost 6 months since the third round of quantitative easing began in America.
The Chairman of the Federal Reserve Ben Bernanke has not wavered on his positive outlook for the QE program.
This quantitative easing effort is one of a different breed, it provides unlimited QE to the Federal Reserve. Therefore, QE3 could go on for the next 20 years, or it could stop tomorrow.
Not only is the time frame unlimited, the amount of money the Fed can create is unlimited. Currently the Federal Reserve is buying $85 billion worth in bonds every month. This number could increase or decrease depending on the preference of the Fed. This process is to go on until the Fed thinks the job market has meet their vague “improve substantially” target.
Potential cost of QE3 downplayed “To this point we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation,” Fed Head Mr. Bernanke said in a meeting on Tuesday. (NY Times)
They do not “see the potential costs of increased risk-taking”. Isn’t this how America got to where it is today economically? It is because we didn’t see the cost of our risk taking. Instead of looking 50 years down the road, we have looked at 4 years down the road over and over again. Therefore, our national debt is over 16 trillion dollars and doesn’t show any sign of slowing down.
The potential risk of continued quantitative easing is inflation. As the Fed creates more money, money becomes less valuable. It is simple economics. Therefore, while the bank’s Fed accounts continue to be filled up, American grocery bills may start to go up. One of the most significant caution signs of the QE3 process is that there is no defined goal. “Improve substantially” (September Meeting Minutes) is as clear as mud, yet the Fed is continuing to pursue a better job market. Hopefully Bernanke and the Federal Reserve do have some definition to “improve substantially” even though they are not sharing it with the public.
How does this influence the Forex market? The risk aversion capacity of the U.S. Dollar could be running thin. Yes, it is still to be considered a safe haven, but in the next few years (if the economy continues to go in the same direction that is going) I think it’s reputation could be so poor that it’s safe haven status could be decrepit. Therefore, if inflation would take place, or another crises like monetary situation, the value of the U.S. Dollar could significantly decrease.
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