© Todd Knoop
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With the US economy growing slower than expected, QE3 is still on the Fed's table. While some officials argue that the QE3 should be implemented in order to stimulate the economic growth, others believe that in order the Fed to come up with the monetary accommodation there should be further deterioration of the economy. Dukascopy Bank SA interviewed Professor Knoop to find out how he evaluates the current economic situation in the US and whether he expects another round of asset-purchase programme.
How would you evaluate the current economic situation in the US?
One of malaise and uncertainty, of only very slowly climbing out of a deep trench.
Do you regard QE as an effective tool to improve a deteriorated economic situation in a country?
Given historically low long term interest rates, I do not think that QE3 will accomplish very much. I am not against it, particularly if the economy continues to falter, but I do not think that it will have substantial benefits right now.
What other impetus and measures should be introduced in order to stimulate the economy?
I personally am in favor of the Fed announcing a temporary increase in their inflation target, to, for example, 3 % for the next two years. I think that the monetary expansion needed to get us to that inflation rate would have an expansionary impact on the economy.
When do you expect the US stable economic recovery? What will be the drivers for economic growth?
Any time now. Just when things appear to be better with the US economy, an external shock (US debt ceiling fiasco, European debt crisis) occurs which once again shocks people back into their shells. I am somewhat hopeful that after the US elections in November—assuming the situation in Europe is continuing to improve—that faster than trend growth will be observed. Unfortunately, I am not at all confident that this acceleration will occur before then.