News Column

JPMorgan Economist Says QE3 to Have Modest Effect On Economy

Oct. 24, 2012

The U.S. Federal Reserve's latest round of quantitative easing, or QE3, was a natural step that would have a "pretty modest effect" both for the United States and the global economy, Bruce Kasman, chief economist of J.P. Morgan, said here Tuesday.

"QE3 does put some downward pressure on U.S. currency value, some modest upper pressure on inflation expectations, which probably supports commodity prices, and perhaps some modest effect in increasing U.S. demand," Kasman told Xinhua.

At the September policy meeting of the Federal Open Market Committee, the Fed unveiled the third round of quantitative easing, an open-ended bond-buying plan to purchase agency mortgage-backed securities at a pace of 40 billion U.S. dollars per month.

The U.S. central bank also decided to keep its ultra-low federal funds rate unchanged at least through mid-2015, a half-year extension from its earlier commitment.

Kasman said the easing policy "is not likely to be a powerful step in terms of providing significant additional support for the economy."

"I don't think it's going to be a dominant force in terms of driving either the U.S. or Chinese outlook over the next year," he said, noting that it was a natural next step for Fed policy.

Unlike QE1 and QE2, QE3 bought more assets, and it did so more in line with a signalling change in its reaction function that was more committed in keeping rates low -- even as the labor market improves - - and more tolerant of some rising inflation, he said.

The economist predicted the United States would probably have another three or four years to go before getting the employment right back to its previous levels.

"Our view on the U.S. economy right now is that there are fairly important and positive things happening in the private sector," which was now capable of generating growth well above 3 percent, he said.

But an intensified fiscal drag was expected in 2013 and thus the economy overall would only deliver lackluster growth of around 2 percent, he added.

With the U.S. presidential election coming in two weeks, Kasman said, the first and most important topic would be how to deal with the so-called "fiscal cliff."

The dreadful term, which refers to predicted massive spending cuts and tax increases starting Jan. 1, 2013, has stirred up worries among many economists.

"Our baseline view is, whether (Republican candidate Mitt) Romney is elected or (President Barack) Obama is re-elected, the agreement will be formed to extend a large part but not all of the fiscal cliff items, most notably the Bush tax cuts," he said.

"And that will still give the U.S. a fairly large fiscal drag next year, but not one that will threaten the economic recovery," he said, adding that he believed tax reform was going to be the main item of debate next year on the U.S. policy.

According to Kasman, the U.S. economy would grow at a similar pace next year, and trade between China and the United States would continue to develop and would see imports from China expand as has been the case consistently.

On the Chinese economy's deceleration, Kasman said it has already stopped slowing and the adjustments of expectations to a slower China growth have been well absorbed.

"So I think what is happening in China has provided a little bit comfort to global investors rather than scaring them," he said.

Source: Copyright Xinhua News Agency - CEIS 2012