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US economy moderately better so no excuse for QE3: Expert
With a moderately better US economic outlook, the US Federal Reserve left monetary policy on hold, but flagged risks to growth that appeared to leave open the door for further easing. In a discussion with CNBC-TV18, Perry Mehrling, senior advisor at INET and professor of Columbia University says that even though the Fed didnt announce another round of quantitative easing, they were ready to do so. But they didnt have an excuse to because US economy is moderately better, he added.
However, he expects to see hard times for the US financial market. US numbers are not going to be affected by whats going on in the US, but what happens outside the US, he explains.
Below is an edited transcript of his interview with Menaka Doshi.
Q: Did the Fed announcement met with your expectations of no big surprises?
A: Yes it did.
Q: There seems to be some anticipation that the Fed if at all it considers third round of quantitative easing (QE) will undertake that only next year. Tell me what you make of the economic data that we have seen come out of the US in the recent past because it seems to me that the Fed was striking a slightly more optimistic sounding note on that.
A: Well I guess I have may be a broader view on that. The main threats to growth in the world today are not about the US but about Europe and other problems elsewhere in the world. But the Fed is statutorily responsible for the US economy, so all of the talk is about what's happening in the US economy, in all of the publications. I am quite sure that there was desire to do QE3, but there is not an excuse to do QE3 because the US economy is doing moderately better.
Q: Take me through why you think there could be a moderate improvement in the US economy?
A: Its all those data that you and your other commentators were mentioning. What I am concerned about, which the market is not paying attention to, is the threats to growth. There are going to be threats to the US coming down the road. The stock market is notoriously near sided in terms of time but it is also short sided in terms of geography; it is looking way too much just at US and way too much just at the most recent numbers. Down the road, we have some hard time coming.
Q: What would you anticipate the Fed could do to be able to deal with those hard times outside of staying the course with its monetary policy?
A: Well I think that it probably is doing something behind the scenes in cooperation with other central banks dealing with the crisis in Europe in particular. But you are not going to see those things on the Feds own balance sheet. These are cooperations of the Fed with the bank of Japan, with ECB and so forth.
Q: Where you expecting the Fed at all to make any more detailed mention of what's going on in Europe right now?
A: Well I wasnt expecting it to, but I think it would be a good idea if we got out of this very narrow geographical focused just on what's happening in the US. The US is a smaller and smaller part of the world economy and we need to be thinking about the consequences of what we do for everyone else and what they do for us as well. This is going forward the most important thing thats going to be affecting the numbers in the US is not what happens in the US but what happens outside the US.
Q: What data will prompt the Fed to in fact announce a QE3? Do you believe that debate is already going on within the Fed, but that they dont have full conviction to go ahead and announce a third round of QE? Also, if it is going to come, when next year do you believe it will come?
A: I think its already coming, its just not happening on the balance sheet of the Fed. Thats a rather complicated argument, but in this latest news release of the Fed, they leave the door open. It says the Committee will regularly review the size and composition of its security holdings and is prepared to adjust those holdings as appropriate. So they are leaving the door open here.
Q: Isnt that the standard language that the Fed uses or has been using for the past several meetings?
A: As I said, they are leaving the door open.
Watch the accompanying videos for the full show..
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