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Will Bernanke announce another round of quantitative easing?

Experts warn against policy initiatives with questionable benefits

By Mamta BadkarBusiness Insider / August 26, 2011

Federal Reserve Chairman Ben Bernanke testifies on Capitol Hill in Washington, before the Senate Banking Committee. Bernanke will deliver his annual keynote speech in Jackson Hole, Wyo., on Friday.

J. Scott Applewhite/AP/File

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As Ben Bernanke's big speech at Jackson Hole Wyoming approaches, everyone has weighed in on whether he will hint at a third round of quantitative easing or other forms accommodation.

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On one hand the U.S. recovery is slowing and global economic sentiment has worsened, but on the other inflation is higher than it was in 2010 when Bernanke launched QE2, and recent economic data hasn't been entirely terrible. Bernanke is also in a tough spot, since three regional Fed bank presidents voted against his decision to keep interest rates ultra low.

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Back in June, Bill Gross co-CIO of PIMCO had said on twitter, "next Jackson Hole in August will likely hint at QE3 / interest rate caps."

But there has been a sea change since then, and now the predominant opinion is "don't get your hopes up."

In an editorial to the Financial Times, PIMCO's other chief, Mohamed El-Erian argues that Bernanke should stave off another round of easing:

"...Rather than embark on another policy initiative (“QE3”) with questionable net benefits, it would be better for Mr Bernanke to use his Jackson Hole speech to reframe the national policy debate and, in the process, set the stage for President Barack Obama’s key economic announcements on September 5.

He should do so in three steps. First, acknowledge that the considerable headwinds undermining economic growth and jobs have important and growing structural elements. Second, explain why a sustainable solution must go well beyond Fed financial engineering and, specifically, incorporate co-ordinated structural reforms on the part of agencies responsible for housing, the labour market, public finances, infrastructure and directed credit. Third, and most delicate, caution that another round of unconventional Fed policies would only be effective if accompanied by these other policy initiatives."

Jim Paulsen of Wells Capital Management also argued against QE3:

"We have created a very bad precedent… The financial markets whine and policy officials jump. The Fed has become the Pavlov’s dog of the stock market, and this is a horrible precedent for policy makers."

Meanwhile John Silva, chief economist at Wells Fargo said the economy needs structural changes (via Marketwatch):