Summary and prediction:
Since 2007, the United States Federal Reserve has implemented two rounds of quantitative easing, as well as “Operation Twist,” in an attempt to inject liquidity within the market and lower long-term interest rates in the hopes of pushing investors into riskier assets and increasing the demand for long-term investment. As the economy continues to drag, speeches by Fed Chairman Ben Bernanke regarding the Fed’s willingness to offer further economic assistance, combined with the predictions of many leading economists, seem to point towards a third round of quantitative easing on the way. Unfortunately for the American people, should this QE3 program come to fruition, it is highly unlikely that it will sufficiently help encourage sustained economic growth within the marketplace. Now that deflation is no longer a looming specter, further quantitative easing could very feasibly result in an inflation rate higher than ideal, especially in the commodities market.
The relative success of QE2, or lack thereof, made it evident that the Federal Reserve does not operate in isolation, and that issues, both domestically and abroad, can stifle the effectiveness of their programs. Domestically, political turmoil has only continued to escalate as the conflict over the debt-ceiling was so severe that it raised uncertainty about the long term viability of the U.S. government’s ability to remain solvent to the point that it led to a downgrade of the U.S. debt. Overseas, the Eurozone continues to face a debt crisis with no ideal or foreseeable resolution in sight. Such factors have led to a heightened sense of uncertainty so severe that despite the credit easing and liquidity raising policies of the Fed, firms and investors still remain extremely risk-averse and prefer to hold lower risk assets despite the increasingly lower returns offered. When considering the effect that this uncertainty had on the long term effectiveness of the QE2 program, it is difficult to imagine that yet another round of quantitative easing will have any more success. While the Fed is intended to be a politically independent entity, when considering such a large scale program as QE3, it is important to address its prospects with a degree of political pragmatism and realistic expectations given the uncertainty of the economic and political environment.
In the end, I believe that a third round of quantitative easing will be implemented despite all the signs pointing towards its high potential for ineffectiveness. It appears that Chairman Bernanke remains convinced that if he can further flatten the yield curve and inject more liquidity into the market, businesses and individuals will move into riskier assets and banks will have no choice but to lend. QE3 will most plausibly use QE2 as a template for implementation, resulting in a purchase of longer-termed government debt and, like with QE2, this third round of quantitative easing will result in a hike in prices for riskier assets and for commodities, yet this effect will only be temporary. As the Fed’s asset-purchases put inflationary pressure on commodity costs, consumption will decrease as consumers devote less of their money to non-energy assets. Politically, the environment will remain hostile and the threat of more regulation, such as with the recent IMF proposal to hike BASEL surcharges on the world’s largest banks, will perpetuate a level of apprehension amongst potential lenders and borrowers that will largely negate the effect of the flatter yield curve. It remains uncertain as to how foreign governments will react to such a program, yet given the opposition to QE2’s dollar-weakening actions, one can surmise that another round of quantitative easing will only further antagonize them. Given the evidence offered, however, it appears that the Federal Reserve will lack the foresight to weigh these external variables, along with the economic warning indicators, and engage in an economically and politically damaging third round of quantitative easing.
 Censky, Annalyn. “Federal Reserve Launches Operation Twist.” CNNMoney. CNN, 21 Sept. 2011. Web. 5 Nov. 2011.
 Brunsden, Jim, and Rebecca Christie. “Citi, JPMorgan May Face Highest Basel Capital Surcharges.” Bloomberg, 8 Nov. 2011. Web. 8 Nov. 2011.