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Federal Reserve chairman Ben Bernanke (Alex Wong/AFP/Getty Images)
Federal Reserve chairman Ben Bernanke (Alex Wong/AFP/Getty Images)

Do setbacks point to QE3? Add to ...

Declining U.S. home prices: Check. Another disappointing report on U.S. manufacturing: Check. Declining consumer confidence: Check. Rising jobless claims: Check. A third round of quantitative easing from the Federal Reserve to give the economic recovery another boost: Maybe....

Tim Duy at Economist's View weighed in, suggesting that the disappointments don't add up to QE3 - not yet: "At this point, I think policymakers are still in 'wait and see' mode," he said. "To be sure, they cannot ignore the spate of weak data. I think it has to be a topic in upcoming speeches. But they can continue to view it as a temporary blip."

According to an article in the Wall Street Journal, a number of economists have been busily downgrading their expectations for U.S. economic growth in the second quarter, which follows a disappointing first quarter. For example, economists at JPMorgan Chase & Co. cut their forecast to 2.5 per cent from 3 per cent. Economists at Bank of America Corp. cut their forecast to 2 per cent from 2.8 per cent.

However, Mr. Duy believes that the bar has been set very high for QE3, especially with headline inflation on the rise due to strong commodity prices. At most, he expects that the Fed will react by pushing back the start of rate hikes -- which most observers don't expect until late this year at the earliest.

"But I think we would need to see a serious downgrade of the 2012 forecast to push the Fed into another round of asset purchases," Mr. Duy said.

Then again, the Fed has made a habit of lowering its outlooks. In its most recent round of forecasts, it looked more optimistic than its peers in the private sector. In April, the Fed estimated that the U.S. economy would grow between 3.1 per cent and 3.3 per cent in 2011, and between 3.5 per cent and 4.2 per cent in 2012.

The economy grew just 1.8 per cent in the first quarter, at an annualized rate.

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