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Wednesday, January 25, 2012

Analysis: Bernanke paves the way for QE3

by Calculated Risk on 1/25/2012 04:30:00 PM

A few quick thoughts ...

• Fed Chairman Ben Bernanke made it clear that no decision on additional asset purchases has been made and that any additional balance sheet expansion would be a "collective" decision, however ...

• Bernanke made it clear that maximum sustainable employment and stable prices (defined as 2% inflation of personal consumption expenditures) are on "equal footing".

• The current projections are for unemployment to be significantly too high for years and inflation to be at or below the Fed's target. That is a strong argument for additional monetary accommodation.

• In the Q&A, Bernanke made it clear that even if inflation moved above the target - and unemployment was still very high - the Fed would only slowly pursue policies to reduce the inflation rate.

• The minutes for the FOMC meeting will probably contain discussion of the outlook for the balance sheet and possible further asset purchases. Those minutes will be released in 3 weeks.

Although the FOMC might still wait until one of the two day meetings in April or June, the likelihood of QE3 being announced at the March 13th meeting has increased significantly.