Minutes of the FOMC Meeting Reignited Expectations for QE3

The Fed Published the minutes of the recent FOMC meeting, which was held at the end of July. The minutes revealed that the Fed might be closer, than many (including me) had anticipated, to issuing another quantitative easing plan in near future. This news reheated the precious metals markets. Currently gold and silver prices are rising.

From the minutes of FOMC meeting:

“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery”. 

This means that many FOMC members are leaning towards issuing another stimulus plan, most likely in the form of another quantitative easing in order to jumpstart the economy.

Since the U.S economy didn’t show any signs of high inflationary pressures, after all the current rate of inflation, core CPI, is at 2.1%, which is very close to the Fed inflation target, this eases some of the concerns of the Fed in issuing another QE program that could lead to higher inflation. Especially since QE1 and QE2 didn’t result, for the time being, in a sharp rise in inflation.

Another snippet worth mentioning from the minutes:

“Consistent with the concerns expressed by many members about the slow pace of the economic recovery, the downside risks to economic growth, and the considerable slack in resource utilization, the Committee decided that the statement should conclude by indicating that it will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

The slow economic progress of the U.S raises the chances that the Fed will act in the near future in issuing QE3: the Philly Fed index, regarding the manufacturing conditions in the U.S, is still negative, U.S GDP rose by only 1.5% as of the second quarter of 2012, housing market isn’t progressing,  and the number of jobs created aren’t adding as they did during the first quarter of 2012.

There are concerns that another quantitative easing plan might have diminishing returns. After all, some think that QE2 didn’t have the same impact on the market as QE1 had.

I have already showed there is a strong and positive relation between the U.S money supply and gold prices: as the money supply rises, gold tends to rise. This could suggest there will be another rise in gold, if the Fed will issue QE3, but this could have a weaker effect than the first and second QE programs have.

For further reading:

  1. Gold and Silver Monthly Outlook for August
  2. 5 reasons for QE3 and 3 against – opinion
  3. On the Relation between QE Programs and Gold Price

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