Federal Reserve Announces Third Round of Quantitative Easing

The US Federal Reserve announced its third round of Quantitative Easing (QE) on Thursday. The move, dubbed as “QE3” differs from previous rounds of QE in that the Fed has indicated it will begin unlimited QE until there is noticeable improvement in the labour market. In addition, the QE will take place via the purchase of mortgage backed securities which is a clear sign that the Fed hope to bring down the high level of mortgage rates in the US and drive up house prices. 

The US economy was particularly weak over the summer due to a combination of the global recession and the recent droughts which will continue to hinder the crop harvest and place upward pressure on food prices. The high rates of unemployment continue in the US and are currently in excess of 8%. 

The aggressive approach by the Fed has not been influenced by the prospect of inflation, commonly associated with QE, which is effectively a form of money printing. This combined with rising food and fuel prices raises significant potential for inflation in the US. The US dollar fell against major currencies shortly after the announcement. Sterling is currently trading at a high of £1.61 against the dollar. 

Further money printing is also expected in the Eurozone following ECB chairman Mario Draghi’s statement that he “will do whatever it takes” to save the Euro. It is difficult to see how the ECB will achieve this without further money printing. 

The news bodes well for those who have invested in gold. The gold price surged to a high of $1.768 per ounce on Friday. Contractors with spare cash and businesses with Euro deposits are currently hedging their exposure to inflation by investing in gold.