QE2 to stay on course

Federal Reserve building
  • Economic data have been improving, but not enough to halt QE2.
  • There is worry about recent acceleration in prices for commodity-based items.
  • Looking to the fourth quarter, GDP is expected to be stronger.

The Federal Open Market Committee meets today, with an announcement expected about 2:15 p.m. EST. There certainly won't be a change in interest rates, and don't expect any changes to the Fed's bond purchase program -- dubbed quantitative easing, or QE2 for short.

The tone of economic data has been better, but not so good as for the Fed to call an early halt to the program designed to keep long-term interest rates low and entice investors into riskier assets. The unemployment rate fell from 9.8 percent to 9.4 percent since the last Fed meeting, but not because there are a bevy of new jobs to be had. Instead, the unemployment rate fell because people stopped looking for work. And that dynamic has to change notably -- with a shift away from people not being counted because they've given up looking to one where vacant jobs begin gobbling up the unemployed masses -- before the Fed is comfortable reining in either QE2 or entertaining thoughts of higher interest rates.

In anticipating the Fed's post-meeting statement, not many changes are in store. While in December the Fed said "measures of underlying inflation have continued to trend downward," that is no longer the case. In fact, there is sufficient worry -- outside the Fed anyway -- about recent acceleration in prices for commodity-based items, such as energy, being driven largely by emerging market growth. Not only could this inflation eventually be imported, but should a spike in oil prices occur, it could threaten the speed of the recovery.

This week also brings the first look at fourth quarter gross domestic product, the measure of economic output. GDP is expected to be stronger, in the 3.5 percent neighborhood, after weak growth in the second and third quarters of 2010. With the Fed holding the status quo on both interest rates and QE2, the GDP may be the big release of the week.


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