Fed to embark on QE3

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Prospects for a third round of the Federal Reserve’squantitative easingprogram (QE3) grew this month afterChairman Ben Bernankesaid the central bank was prepared to ease further if economic growth and inflation falter again.

Nearly in one in two fund managers surveyed by Bank of America Merrill Lynch this month said QE3 was likely.

Traditionally risky or high-yielding assets such as global equities, energy and commodities and emerging markets surged in the months after the Fed gave the green light for Round Two of QE — which involved $600 billion in new money in the form of Treasury debt purchases and which ended last month.

But the impact on the U.S. economy and the labor market has been less obvious, given that growth has slowed significantly into 2011 — at least partly because higher energy costs have undermined consumer spending everywhere. Asset prices, as a result, have retreated sharply again since April’s peaks.

This has given rise to a debate about whether QE3 works.

Since Bernanke unveiled the Fed’s QE2 bond buying program in a speech in Jackson Hole in August last year, Brent crude oil have risen 58 percent, while the benchmark CRB commodities index has gained nearly 30 percent.

May or may not

Some advocates sayquantitative easingworks best by revaluing financial assets so that there will be a positivewealth effectfor U.S.consumers, encouraging them to start spending again. The Fed argues that it boosts credit in a similar way to an orthodox easing by directly lowering long-term benchmark borrowing costs.

A successful resolution of U.S.debt negotiations may leave the dollar under pressure because it makes more likely a third round of Federal Reserve asset purchases dubbed quantitative easing, BNP Paribas SA said.

But the effect of ample dollar liquidity spreads beyond the United States, largely because emerging economies either are pegged to the dollar or have inflexible exchange rate policies. Even economies that do allow their currencies to appreciate are at risk of asset bubbles as cheap money seeks higher yields.

The UAE is one of these emerging economies that has its dirham pegged to the US dollar. Earlier this year, a Dubai Government economist had expressed doubts over the falling dollar. Further falls in the value of the dollar could threaten the countrys economic performance, said Abdulrazak al Faris, the chief economist of Dubai Economic Council. If we have a crisis in the dollar it will raise questions, he said yesterday. Even though we may not move away from the dollar in the foreseeable future its important to have an exit strategy so we know what to do if a crisis happens.

Sources: Reuters, Bloomberg

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