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Fed QE3 could hurt world economy: scholar

2012/09/14 16:46:51

Taipei, Sept. 14 (CNA) A third round of quantitative easing (QE3) announced by the U.S. Federal Reserve is expected to have an adverse impact on the global economy in the long run, a local economist said Friday.

Chiou Jiunn-rong, a professor at the Department of Economics of National Central University, said QE3 is expected to boost inflationary pressure around the world as the Fed will pump as much liquidity as possible into the market.

In the latest policymaking meeting that ended overnight, Fed Chairman Ben Bernanke said the U.S. central bank will spend US$40 billion to buy mortgage-backed securities each month for however long it deems necessary.

Along with its current "operation twist" program in which the Fed is buying long term bonds but selling short term bonds to keep long term interest rates low, the central bank is expected to inject US$85 billion in funds into the market every month.

The Fed said it aims to keep interest rates at "exceptionally low levels" until mid-2015. Before the QE3 launch, the central bank had previously planned that interest rates would remain low until late 2014.

Chiou said that as the world is faced with rising consumer prices, in particular an increase in food prices due to recent droughts, the FED move to provide the market with a large quantity of funds is expected to lift inflationary pressure significantly.

Chiou said ample liquidity in the U.S. after QE3 will have a spill-over effect on other countries, which is likely to boost the values of non-U.S. dollar currencies.

The professor said he is afraid that those countries that are dependent on exports for their economic growth will step up efforts to devalue their currencies by taking idle money out of the market to strengthen their global competitiveness.

As a result, the efforts to absorb redundant liquidity are expected to compromise the effect of the Fed's further stimulus monetary easing measures, he said.

In fact, Chiou said, the previous two rounds of QE by the Fed failed to boost the economy significantly.

The Fed launched the first round of QE between December 2008 and March 2010, and conducted the second round between November 2010 and June 2011.

Meanwhile, Polaris Research Institute, one of Taiwan's leading economic think tanks, said it was surprised by the Fed's plan to buy mortgage-backed bonds without limits in the latest stimulus measures.

The think tank said that as the size of the fund injections is larger than the market had expected, the stimulus measures will boost investors' appetite to take risks in the equity markets.

On Friday, the weighted index on the Taiwan Stock Exchange closed up 2.10 percent at 7,738.05 points, the highest level since April 13, on the back of the QE3 annoucement.

(By Lin Hui-chun and Frances Huang)