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Fed's QE2 announcement eases liquidity concerns

By Li Xiang and Tan Yingzi (China Daily)
Updated: 2011-04-29 09:11

An employee counts notes at a branch of Agriculture Bank of China in Qionghai, Hainan province. The US central bank has kept the cost of borrowing at historic lows since December 2008. [Photo / China Daily]

Analysts say move won't check the inflationary pressures in China

BEIJING/WASHINGTON - The United States Federal Reserve's announcement that it will end its second round of quantitative easing, known as QE2, on schedule in June has eased concerns over further growth of excess liquidity in the global economy, analysts said on Thursday.

However, they warned that the move is unlikely to alleviate China's high inflationary pressure in the short term.

Related readings:  Another round of money creation to follow QE2  StanChart warns of QE2 inflation danger  QE2 hot money  China should be cautious about the Fed's QE2

"That the US will not expand its quantitative-easing program is a positive message as the global economy is already faced with excess liquidity," said Chen Daofu, policy research chief at the Financial Research Institute of the State Council's Development Research Center.

Ben Bernanke, the Fed chairman, said on Wednesday that the United States will maintain its policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of long-term treasury securities.

The Fed will keep interest rates accommodative, maintaining a target range of between zero and 0.25 percent and there is no specific time frame to raise interest rates, Bernanke said.

Chen said that commodity prices will be stabilized and that capital may flow back to the US if the Fed starts to tighten monetary policy, which will also help to contain China's imported inflation.

"But when the tightening cycle will begin remains an uncertainty," he said, adding that the Fed is unlikely to raise the interest rate until the end of this year.

The US central bank has kept the cost of borrowing at historic lows since December 2008 and its loose monetary policy has drawn criticism both at home and abroad.

The dollar has dropped by more than 11 percent against six other major currencies, making US exports cheaper but also contributing to higher prices for imported energy. Other large economies, such as China, Russia and Germany, have all expressed concern over the falling dollar, which they say will affect the global economic recovery.

"The Fed's announcement simply signaled that there won't be further quantitative easing. But it did not exit from a loose monetary policy, which means liquidity in the global economy will remain loose and commodity prices will stay at a high level," said Sun Chi, an economist at Nomura Securities.

"The implication for China is that the inflationary pressure will remain high and it is unlikely to ease this year," she added.

Nomura forecast in a report that China's inflation will rise in the coming months, averaging 4.9 percent in 2011 and 5.3 percent in 2012, driven by the still-high input costs of raw materials and wages and excess liquidity.

In the meantime, economists are concerned that the end of the Fed's $600 billion bond-buying program may push bond prices lower and could hurt the interests of China, which is a major holder of US debt.

However, Zhuang Jian, a senior economist at the Asian Development Bank, said that the risk of lower bond prices could be offset by the stronger dollar if the US starts to tighten its monetary policy.

On Wednesday, Bernanke affirmed that "a strong and stable dollar is in the interests of the United States and the global economy".

"Our view is that, the best thing we can do for the dollar is to keep the purchasing power of the dollar strong by keeping inflation low and by creating a stronger economy," he said.

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