Fed unleashes QE3 but warns of "fiscal cliff" over deficit

The Chairman of the Federal Reserve, Ben Bernanke, pulled the trigger on the third round of quantitative easing (QE) in the United States yesterday.

The Fed will pump $40 billion into the US economy every month until the economy recovers and unemployment shows consistent reductions.

Launching “QE3”, Mr Bernanke said: “We are not going to be premature in withdrawing this.”

His statement showed strong intent to do whatever it takes to improve the economy as he promised to keep interest rates low until at least the middle of 2015.

However, he warned that “QE is not a panacea” and that the Fed cannot cure all of the problems with the US economy.

In a pointed attack at politicians from both sides, he called on them to sort out the US debt problem which has been on hold since last summer.

This week, Moody’s the credit rating agency, said that it would cut the US’s credit rating by one notch from triple-A if budget negotiations in Congress failed to make any progress.

Ahead of an election, the republicans and democrats have failed to reach an agreement on how to reduce the deficit.

Unless an agreement is reached before January 1st, more than $600 billion of spending cuts and tax increases will automatically kick-in.

Mr Bernanke warned that the US is heading towards a “fiscal cliff”.

At a press conference, he said: "If the fiscal cliff isn't addressed, as I've said, I don't think our tools are strong enough to offset the effects of a major fiscal shock so we'd have to think about what to do in that contingency.

"So I think it's really important for the fiscal policymakers to, you know, work together to try and find a solution for that."

Mr Bernanke said that the failure of politicians to reach an agreement was hindering the economic recovery.

"A lot of firms are waiting to see whether that problem will be resolved, and if so, how? I think it is a concern. It is something that is affecting behaviour now."