After widespread speculation that the Federal Reserve would begin to taper its $85 billion-a-month stimulus program turned out to be incorrect, experts are now concerned about a possible currency war breaking out. The Fed announced yesterday that it would continue its quantitative easing (QE) program, going against analysts’ expectations that it would begin to cut back the program.
QE was begun as a stimulus to keep interest rates low and encourage investment. According to The Guardian, the federal open market committee (FOMC) said it had “decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.” Federal Reserve chairman Ben Barnanke cited the debt limit and possible government shutdown as the main reasons for continuing the QE program.
Congress must agree on some kind of short-term plan to continue to fund the government, as its funding is set to expire on Sept. 30. If they cannot pass a bill by then, many federal programs will be shut down indefinitely Oct. 1. Along with that, if Congress does not agree to raise the debt ceiling, which will reach the $16.7 trillion limit at the end of the month, the nation may default on its debt.
The FOMC has found these conditions too risky for the sluggishly-improving economy, so it will continue its stimulus program, likely until it reaches its goal of dropping the unemployment rate to 6.5 percent – a goal they expect to reach sometime next year.
However, experts fear a currency war is not far away if the bond-buying program continues. The dollar could end up in a “protracted downtrend,” according to currency strategist Shahab Jalinoos. Analysts expect central banks to respond to the Fed’s decisions; The Reserve Bank of Australia is expected to be one of the first to do so, as it is already anticipated that it will lower its interest rates by the end of the year.
“We are on the verge [of a currency war] … especially if the Fed does not taper in October or December.” Boris Schlossberg, Money News