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QE3 still an option

By Polyana da Costa · Bankrate.com
Thursday, October 13, 2011
Posted: 1 pm ET

After numerous unsuccessful attempts to help jump-start the economy, some Fed members still seem to think that pumping more money into the bond market will help solve our problems.

Twice, the Fed has decided to print money and go on a bond-buying spree to help save the economy. Twice, the programs -- QE1 and QE2 -- failed to do the job. What makes them think a third time will be a charm?

Many market analysts have said it was unlikely the Fed would go for a QE3 because it simply doesn't make sense to persist on the same error. But according to minutes from the last Federal Open Market Committee meeting, QE3 is still on the table.

"A number of participants saw large-scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted," according to the minutes released Wednesday.

In other words, if the economy doesn't improve soon, the Fed could opt for a third round of quantitative easing. QE3 would differ from Operation Twist, the bond-buying program the Fed announced in its last meeting. In Operation Twist, the Fed simply reinvests the money from short-term securities into long-term securities. With QE3, the Fed would print money out of thin air and buy bonds, increasing the size of its portfolio.

Why is that a problem? Inflation. And some Fed members know that.

From the minutes:

"Some judged that large-scale asset purchases and the resulting expansion of the Federal Reserve's balance sheet would be more likely to raise inflation and inflation expectations than to stimulate economic activity."

Are there any advantages to QE3? Well, it could help keep mortgage rates low -- maybe. (See how QE1 and QE2 affected rates.)

But Operation Twist is already supposed to do that, although mortgage rates rose this week.

Still, super-low rates are less important than jobs are to the 14 million people who are out of work.

What you think? Should the Fed give it a third try?

Follow me on Twitter @Polyanad

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