Bloomberg News

RBC’S Porcelli Sees September QE3 on Deflation Risk

July 16, 2012

Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC, said the Federal Reserve may need to consider a third round of quantitative easing as early as September to counter deflationary risks.

Porcelli, in a television interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt, said the minutes of the Fed’s June meeting indicated the central bank would “study the impact” of additional asset purchases. Porcelli said the discussion about possible deflation will “gather a lot of momentum” if inflation starts to drift lower.

“It’s going to start the broader market talking about deflation,” Porcelli said. “It’ll embolden the doves at the Fed to basically say, ‘Hey look we are in a potential deflationary environment. Maybe it’s time to kick in QE3.’”

The Fed bought $2.3 trillion of securities in two rounds of so-called quantitative easing after cutting its benchmark interest rate to zero in December 2008. Chairman Ben S. Bernanke signaled in June the U.S. central bank is prepared to increase its record stimulus if the economy fails to make sufficient progress in creating jobs.

“The data will lend itself to QE in September,” according to Porcelli, who said he previously predicted the Fed would act at its meeting ending on Aug. 1. The policy-making Federal Open Market Committee is also scheduled to meet on Sept. 12-13.

Porcelli said today he expects the consumer price index to fall to “some 1 percent” this year. The index rose 1.7 percent from a year earlier in May.

New Program

Federal Reserve Bank of Atlanta President Dennis Lockhart said last week the central bank may need to begin a new program of asset purchases if economic growth continues to lag.

Lockhart joins the ranks of Fed officials who are prepared to consider additional stimulus after a report showed that payroll growth lagged behind forecasts in June. The Atlanta Fed president cited the release of minutes from the last meeting as showing as many as four policy makers are “quite receptive at this time” to further easing.

The minutes also show policy makers considering the risk that further easing might pose. Some members of the committee noted that excessive purchase of Treasuries could “at some point, lead to deterioration in the functioning of the Treasury securities market that could undermine the intended effects of the policy.”

Prices rose 1.5 percent from a year earlier in May, as measured by the personal consumption expenditures price index, the Fed’s favored measure. The gauge is the lowest since January 2011 and has dropped from a 2011 peak of 2.9 percent in September.

Slowing Growth

Porcelli also said economic growth is likely to slow to 0.9 percent in 2013 if the combination of budget cuts and tax increases known as the “fiscal cliff” kicks in at the start of the year.

“Our call is actually built on the fiscal cliff actually hitting,” Porcelli said. “That’s a call on just the basic ineptitude of Washington, D.C. If they find religion, then we’ll change our call.”

Unless Congress acts, the George W. Bush-era income tax cuts will expire, as will a temporary cut in the payroll tax. About $1.2 trillion in automatic spending cuts over a decade will be poised to start, expanded jobless benefits will expire, and the government will approach the legal limit on federal borrowing.

To contact the reporter on this story: Caroline Fairchild in New York at cfairchild2@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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