Will FOMC end QE3 by the end of 2013?

The minutes of the recent FOMC meeting were published and didn’t reveal anything new: several members still think the current asset purchase program, in which the Fed is purchasing each month $85 billion of mortgage backed securities and long term treasuries securities. They didn’t say Fed should end now the QE3 program, but did voice their concerns regarding the effectiveness of this mechanism in jump-starting the economy.

“Overall, most meeting participants thought the risks and costs of additional asset purchases remained manageable, but also that continued close attention to these issues was warranted. A few participants noted that curtailing the purchase program was the most direct way to mitigate the costs and risks.”

The main dispute is about not only the effectiveness (including risk vs. benefit) of the asset purchase program but also the growth of the U.S economy that will eventually determine the progress of the asset purchase program.

“A few others saw the risks as increasing fairly quickly with the size of the Federal Reserve’s balance sheet and judged that the pace of purchases would likely need to be reduced before long. Many participants, including some of those who were focused on the increasing risks, expressed the view that continued solid improvement in the outlook for the labor market could prompt the Committee to slow the pace of purchases beginning at some point over the next several meetings, while a few participants suggested that economic conditions would likely justify continuing the program at its current pace at least until late in the year.”

Therefore the recent U.S labor report raised the chance of the Fed keep the current QE3 program.

The rise in the U.S money base may have contributed in the past to the rally of precious metals, but in recent months the money base rise but the price of gold only falls.

gold and us money baseIt seems that if QE3 will end soon, this news will have an adverse effect the price of gold. But if the QE3 will continue, it won’t help rally the price of gold.

Another issue will be the government’s role in jump starting the economy.  In the meantime, the Federal budget monthly update showed the deficit continues to grow but at a slower pace than in the past – in the fiscal year of 2013 the deficit was 23% below the deficit recorded during the same time in 2012.


For further reading: