Federal Reserve chief Ben Bernanke has cautioned emerging markets about the spillover liquidity effects of a QE3.
In discussions with the governor of Reserve Bank of India (RBI), Duvvuri Subbarao, when on his recent visit to India together with US Treasury secretary Tomothy Geithner, Bernanke is understood to have expressed the view that in some ways excess liquidity could have deleterious consequences for emerging economies and that they should be prepared to impose capital controls, if necessary. In other words, they needed to weigh both the benefits and costs of the easy liquidity situation and act accordingly.
In September, the FOMC announced a new round of ?open-ended? purchases of securites of $40 every month in addition to the extention of Operation Twist.
The ECB unveiled an Outright Monetary Transactions framework on September 6 involving the purchase of government bonds in the secondary market. QE1 was announced in March 2009 and QE2 in late August 2010
Bernanke reportedly indicated that given the tough global economic environment, the US had had little option but to persist with an accommodative monetary stance, exiting which could prove to be difficult. However, the Fed chief is understood to have told governor Subbarao that empirical evidence suggested very little direct correlation between the quantitative easing undertaken and the sharp rise in the price of crude oil.
Bernanke had identified other factors, such as the lower supplies of oil as the primary reason for the sharp spike in prices of the commodity.
