Marcus Evans Group | Worldwide Headquarters | American Offices | Latin America | European Offices | African / Asian Offices

Ben Bernanke plays down QE3 hopes

US investors had been hoping for a clear signal from Bernanke that QE3 – a third dose of quantitative easing – was on the way

Federal Reserve chairman Ben Bernanke played down hopes that he is poised to unleash a fresh round of recession-busting quantitative easing on Wednesday, after official figures showed the world’s largest economy expanding faster than first thought at the end of 2011.

In its latest estimate of fourth quarter growth, the US Commerce Department said GDP expanded at an annual pace of 3% – up from its previous estimate of 2.8%.

In his twice-yearly so-called Humphrey Hawkins testimony before Congress, Bernanke struck a bearish tone, telling Representatives that it would be some time before unemployment began falling from its current level above 8%.

“The job market is far from normal,” he said, appearing before the House of Representatives Financial Services Committee. “Continued improvement … is likely to require stronger growth in final demand and production.”

However, as the European Central Bank in Frankfurt announced that it had pumped another €530bn of cheap loans into eurozone financial markets, US investors had been hoping for a clear signal from Bernanke that QE3 – a third dose of quantitative easing – was on the way.

Instead, Bernanke made clear he and his fellow Fed governors are still weighing up the strength of the world’s largest economy.

“In light of somewhat different signals received recently from the labour market than from indicators of final demand and production … it will be especially important evaluate incoming information to assess the underlying pace of the economic recovery,” he said.

The price of safe haven assets such as gold and silver fell sharply as Bernanke spoke, with the gold price down by almost an ounce at one point.

Stock markets gave up their early gains during his testimony, after bouncing on the ECB’s announcement that Europe’s banks had sucked up €530bn in cut-price emergency loans from the European Central Bank.

The ECB’s long-term refinancing operation (LTRO), which offers banks three-year loans at an interest rate of 1%, was the key crisis measure introduced by its governor Mario Draghi, last year to stave off the risk of a full-blown credit crunch in the euro area.

The Frankfurt-based lender said on Wednesday, a day after banks were invited to bid for the loans, that 800 financial institutions had borrowed a total of €529.53bn, in line with market forecasts, taking the total borrowed under the LTRO to more than €1trn.

Michel Martinez, a eurozone economist at SocGen, described it as a “goldilocks allocation” – neither too large, nor too small, to alarm financial markets.

“In a nutshell, the amount allocated at the ECB’s second 3-year LTRO seems to strike a good balance between a very large number that may have been seen as a sign of weakness of the banking sector and a small number that would have been seen as not making much difference to risk assets.”

Analysts also said the large number of borrowers suggested smaller banks had been able to tap the cheap loans, as well as the large institutions that were seen as the main beneficiaries of the previous round of funding.

However, some banks, including Standard Chartered and ING, were keen to distance themselves from the operation by insisting they had not taken up any of the €530bn.

In the first LTRO, in December, the ECB lent just under €500bn. The measure was widely seen as critical to restoring calm to financial markets – and patching up the finances of struggling European banks. Italian and Spanish lenders used the funds to buy their governments’ bonds, helping to bring yields down to more manageable levels.

However, some economists have warned that the LTRO is storing up huge problems for the future, if the eurozone banks have failed to recover strongly enough by the end of the three-year period to wean themselves off public support.

Investors had warned that a higher-than-expected take-up of the LTRO could signal distress among eurozone banks.

Christel Aranda-Hassel, economist at Credit Suisse, said the ECB was likely to hold fire for the time being from offering a fresh boost to the economy — by resuming interest rate cuts, for example. “We expect the ECB to take a back seat now and assess the effect of its liquidity injection.” © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds