Fed Unlikely to End QE Anytime Soon- El-Erian

El-Erian lays out the case as to why the Fed will not end QE operations anytime soon in a blog piece at FT.com

First, market reactions are unlikely to force the Fed to abandon QE. Unlike in other open economies, the US central bank does not alter policy course because of exchange rate movements. And while inflationary expectations may well increase over time, they are unlikely to do so at a highly alarming rate. This is especially so when an orderly rise in inflation, along with the Fed’s current regime of “financial repression” (where artificially low interest rates subsidise debtors at the cost of creditors), serve to gradually deleverage overextended segments of the economy.

Second, unlike the Bank of Japan, which is now succumbing to the political pressure applied by Prime Minister Shinzo Abe, America’s highly polarised politicians are in no position to force change on the Fed. Not only are they too busy with self-inflicted fiscal problems; I suspect they are also relieved that the Fed attracts so much of the economic policy focus.

The only way the Fed will abandon QE any time soon is if America’s growth rate and job creation reach “escape velocity”. For this to happen, Congress would need to encourage tailwinds rather than headwinds. Absent that, it will take some time for the economy’s ongoing endogenous healing to attain critical mass.

Since Congress doesn’t look to be getting its act together any time soon, the Fed will face an uncomfortable choice at every policy meeting in the next few months: either continue to use imperfect policy tools and risk greater collateral damage on a widening front; or stop and undermine the economy’s momentum.