It’s been bizarre how market participants have continued to discuss the potential for QE3 in recent months given the clear communications from the Fed of late. In case there was any confusion, they were very clear today – the Fed will not implement QE3 unless inflation drops below 2%. Here’s the key line from today’s release:
“The Committee also stated that it is prepared to adjust the size and composition of its securities holdings as appropriate to promote a stronger economic recovery in a context of price stability. A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandateconsistent rate of 2 percent over the medium run.”
That’s pretty crystal clear. As long as core inflation is above 2% the Fed is on hold. With the core at 2.2% and unlikely to drop down well below 2% in the coming months we can likely conclude that means no QE3 any time soon….