Fed’s Williams Hints at QE3, Economists See 70% Likelihood

“It is essential that we provide sufficient monetary accommodation to keep our economy moving towards our employment and price stability mandates…The most effective tool would be additional purchases of longer-maturity securities, including agency mortgage-backed securities.”

The above commentary was from a speech this morning by John Williams, President of the Federal Reserve Bank of San Francisco.  Williams, a current voting member of the Federal Open Market Committee (FOMC), discussed his outlook for the U.S. economy and monetary policy before a bankers’ convention in Coeur d’Alene, Idaho on Monday.

Williams pointed toward ongoing challenges in the labor markets, noting that “progress on bringing down the unemployment rate has probably slowed to a snail’s pace and perhaps even stalled” in recent weeks.

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As for Operation Twist, which the Ben Bernanke-led central bank extended at last month’s Fed meeting, Williams stated that it is likely to have only “a relatively modest impact” on the economy.

Williams was not the only Fed President to discuss the potential for a third round of quantitative easing (QE3), as Chicago Fed President Charles Evans – known as one of the most dovish U.S. central bankers – called for the Fed to expand its balance sheet in a separate speech this morning.  Evans, however, is not a voting member of the FOMC this year.

Not only has talk of QE3 by policymakers increased of late, but a growing number of economists see the Fed implementing another money printing program in the near future.  According to the latest Reuters poll of economists at primary dealer institutions (largely investment banks), 70% of respondents now expect the Fed to launch QE3 by the end of this year.  This figure represents a significant increase over the 50% level recorded on June 20th.

David Resler, a U.S. economist at Nomura Securities, placed the odds of QE3 by at 75% and said it may arrive at the Fed’s next meeting in August.  ”At this juncture, I think it’s coming,” Resler noted, “primarily because the job market isn’t improving enough to give the Fed sufficient comfort.”