QE2 policy will work for U.S. economy, but in limited way: economists

08:20, November 01, 2010      

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Will the QE2, or second round of quantitative easing policy, which will likely be announced by the Fed in November, actually work? Some economists gave their mixed opinions on the 16th Chinese Finance Association Annual Conference on Saturday.

"It will work," said David Greenlaw, Chief U.S. Fixed Income Economist of Morgan Stanley in his speech. He pointed out that given an assumption of two trillion dollars asset purchase by the Fed, it will push down 50 basis points of the 10-year treasury bond yield. And the U.S. GDP growth will be 0.3 percent higher in 2011, 0.4 percent higher in 2012. The unemployment rate will be 0. 3 percent lower in 2011, 0.5 percent lower in 2012.

However, Greenlaw emphasized that all those assumption was based on the liquidity would favorably inject into real economy through financial sector. The money was not thoroughly inflow into the real economy was the main reason why the previous monetary easing policy did not make obvious effect in reviving economy.

Ethan Harris, Chief economist for Developed Market of Bank of America Merrill Lynch, held a similar opinion but more optimistically. He said the Fed was "doing the right thing" and he predicted the U.S. GDP growth would be 2 percent in 2011. He said the largest risk the U.S. economy was facing was deflation, not inflation.

Also, Torsten Slock, Director of Global Economics of Deutsche Bank Securities, Inc, gave his prediction. He said under the assumption of one trillion dollar purchase, the yield of long-term government bond would lose 50 basis points, while the equity market would rise by 5 percent, the unemployment would fall by 0.2 percent, the inflation would go up by 0.1 percent, and the dollar would depreciate by 4 percent.

Slock pointed out that QE2 would push rates down significantly and help repair household and banking sectors' balance sheet, and also raise asset price both for fixed income and equity. He said the U.S economy needed correction of imbalance in the housing, banking and household sectors. It would take one to two years. As soon as the imbalance is corrected, there will be huge adjustment in asset prices.

James Sweeney, Director of Global Strategy of Credit Suisse, gave a speech titled "unyielding recovery." He firmly believed the U.S. economy was on track of gradual recovery. The QE2 pulled out by the Fed would be a great stimulus to the market. The liquidity injected to the economy and the confidence regained in the market would combine to buoy asset prices.

However, some economists said "no" to the Fed's QE2. Stephen Roach, Chairman of Morgan Stanley Asia, said the QE2 would not do any good to help the economy to recover. Jing Lu, Executive Director of International Audit and Corporate Securities of CICC World Markets, also pointed out that there were no better alternatives, so the effect of QE2 was more of helping to stimulate the market's confidence than make the economy really gets better.

Source: Xinhua


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