QE or no QE in the 2012?

Last week, the Fed's policy committee met for the first time since they last announced the shift towards greater policymaking transparency from the US Central Bank.

Let´s go back for a moment to the first week of January when the Federal Reserve Board and the Federal Open Market Committee disclosed the conclusions arrived at during the Committee meeting held on December 13, 2011. The released document explained that starting January, the Fed had plans to become more transparent than it has even been and expressed its firm intent to start publishing interest rates forecast. These estimates, which will be based on growth, unemployment and inflation expectations, should contribute to the growth of the economy during 2012 and the subsequent years. With these new changes, the FOMC members will need to reveal their forecast four times a year.

As expected, the new changes were not welcome by all members as some of them doubted the effectiveness of the new measure. Some consider that the data that will be posted could be misinterpreted by investors.

It is clear that Bernanke is trying to turn the page and provide the market with more information. Transparency tends to be much appreciated by the markets and this time it was no exception to the rule. In fact, the major indices have reacted positively since the above mentioned announcement.

The U.S Federal Reserve has announced it will set a 2% long-term inflation target and will maintain the current monetary policy until the end of 2014 with interest rates near the zero mark. The Fed also lowered its 2012 GDP outlook to a range of 2.2% to 2.7% versus the formerly set of 2.5% to 2.9%. The FOMC expects a slight improvement in the unemployment rate with a small but not insignificant decrease from the 8.5% ? 8.7% to the 8.2% ? 8.5% range. Finally, Bernanke explained that even though there are signs of improvement in the U.S business climate, they prefer to maintain a cautious attitude due to risks related to the bad economic times experienced in the old continent and a threat of global slowdown. Last week, China announced that its GDP growth rate for 2011 slipped to 9.2 percent, which is the worse read of the Chinese economic gage since the second quarter of 2009.

Therefore, the Fed chairman, once again, said the central bank is ready to take additional action to ensure the growth of the biggest economy in the world and let it be negatively affected by uncontrolled factors.

This being said how can we figure out the Fed's intentions about a new stimulus plan? We shall ask how the following three indicators would behave if the Federal Reserve is to consider such action:

Unemployment rate: stagnation of the unemployment rate or its increase

GDP: the perception of a slowdown of economic activity

Inflation: implementing a QE could raise inflationary pressure. Therefore, they should be able to keep the inflation rate of 2% set before they decide to take action.

QE or no QE in the 2012?

That´s the million dollar question. Mr. Bernanke is the only one who could answer this question, however he is very good at keeping the level of suspense high as far as this specific decision is concerned.

If the main message of the Fed during this new area of monetary policy is to be more transparent, we hope that in future meetings, this new sentiment will prevail and clearer signs whether or not a new round of liquidity injection will take place will be shared with the public.

Article written by Luisa Martinez, senior analyst at Miramar Capital.