Before the announcement on Thursday by Ben Bernanke, the chairman of the U.S. Federal Reserve, and his colleagues, the American central bank had already allowed such an expectation of a third round of quantitative easing to grow up that a decision not to announce such a program would have had a dampening effect. But diminishing returns had already set in before this week’s decision, and QE3 – which comes close to printing money – is not likely to have much effect.
Monetary policy is especially tricky during a presidential election campaign. The central bank (as in other countries) is inclined to try to keep things on an even keel, in order to appear neutral as between Barack Obama and Mitt Romney. With worries about a slight stalling in this sensitive period, particularly because of the euro zone’s trouble, fiscal tightening in American states and municipalities and the “fiscal cliff” at the federal level, the central bank has seen fit to add some extra stimulus, in order to stay more or less in the same place.
The unemployment rate is of particular concern, both to the Federal Reserve and to the American voters in November, not only as expressed in statistics but also as experienced by the labour force – and by those who have stopped looking for jobs. The upshot is that the central bank has a difficult time escaping the appearances of favouring the incumbents, by averting a downturn.
“Printing money” is a phrase often used to signify a loosening of credit conditions and the resulting monetary expansion. But quantitative easing creates money out of nothing, and QE3 is expected to add US$85-billion each month more to the central bank’s balance sheet, at least until the end of 2012.
Eventually, the Federal Reserve will have to unwind the abnormal measures they have been induced to take since 2008. That reversal will have costs of its own.
The American central bank deserves sympathy for having to take exotic steps to compensate for bad fiscal and regulatory policies. That is all the more reason for future prudence on all fronts.