Fed is not expected to make any mention of a possible QE3

The gold price hovered under $1,550 per ounce Wednesday morning ahead of the conclusion of the two-day Federal Open Market Committee meeting. The price of gold continues to consolidate in the mid-$1,500s as global markets wrestle with both sovereign debt issues and a string of weak economic data. The 12:30pm ET announcement from the U.S. central bank will offer additional clues as to Chairman Bernanke’s views on inflation and the economy. A downgrade to the Fed’s outlook on the U.S. economy could lead to higher gold prices if investors perceive any possibility of a new round of asset purchases.

The Fed is expected to stay the course, which includes holding the fed funds rate near zero and announcing that its second round of quantitative easing is set to end on June 30. The Fed is not expected to make any mention of a possible QE3. In a Bloomberg survey of 58 economists, 46 forecasted that the Fed’s balance sheet will remain at its current size of $2.8 trillion. Ninety percent of respondents predicted the Fed will not remove the “extended period” language with respect to keeping interest rates near zero until the fourth quarter of this year.

While expectations are for Bernanke and the Fed to keep its current monetary policies on hold, a recent wave of disappointing U.S. economic data may prompt the central bank to make the tone of its statement more dovish. Ward McCarthy, chief financial economist at Jefferies & Co., wrote in a note to clients that the Fed will “have to acknowledge that the recovery has decelerated, but want to avoid fanning the fires of QE3 expectations.”

Over the longer-term, however, McCarthy did not rule out the possibility of QE3. “If, some months down the road, it looked like the economy was headed into a nose dive they’d probably pull a QE3 off the shelf.”

Comments

Popular posts from this blog

Gold edges up on weaker dollar, dovish U.S. Fed policy bets

India, not Trump, is the real reason behind the crash in gold prices

For the gold price, two outcomes are possible.