QE3 may do more harm than good London

Thursday, 28 July 2011 00:41 - - {{hitsCtrl.values.hits}}

(Reuters) - There may be a point at which global investors get indigestion from U.S. money printing.

A fresh round of U.S. monetary easing may even do more harm than good for long-term investors as another flood of easy money into fast-growing emerging economies risks refueling oil and commodity price inflation, sapping consumption and growth.

Prospects for a third round of the Federal Reserve’s quantitative easing program (QE3) grew this month after Chairman Ben Bernanke said the central bank was prepared to ease further if economic growth and inflation falter again.

Nearly in one in two fund managers surveyed by Bank of America Merrill Lynch this month said QE3 was likely.

The temptation for risk-loving investors is to rub their hands with glee. Traditionally risky or high-yielding assets such as global equities, energy and commodities and emerging markets surged in the months after the Fed gave the green light for Round Two of QE -- which involved $600 billion in new money in the form of Treasury debt purchases and which ended last month.

But the impact on the U.S. economy and the labor market has been less obvious, given that growth has slowed significantly into 2011 -- at least partly because higher energy costs have undermined consumer spending everywhere. Asset prices, as a result, have retreated sharply again since April’s peaks.