Aug 2, 2011
In Mehra’s view, the pace of the weakening in the United States raises questions about proposed cuts in government spending and supports the case for more quantitative easing (QE) from the Fed.
“Since the onset of QE2, we have believed that QE3 was a possibility. The disappointing job market numbers for the last two months and the current weak GDP growth data will force the US Federal Reserve to postpone any monetary tightening and instead focus on strengthening the recovery,” said Mehra.
“Government spending cuts have already begun and have also started impacting economic growth. With further cuts in government spending, either the Federal Reserve will have to announce QE3 earlier than expected, which will partly offset the fiscal tightening, or the possibility of the US economy once again falling into a recession cannot be fully ignored,” said Mehra.
The view that economic weakness will lead the Fed to pump more money into the system is gaining ground with others as well.