As if we didn’t all know it already — today is Judgment Day for the Fed.
So, will they or won’t they save humanity from Skynet ongoing economic malaise with a healthy fresh round of quantitative easing?
All will be clear at 6:15pm London time/2:15pm in New York.
But, in the meantime — and to help exaggerate the build-up — here are some of the latest thoughts from the analyst universe on Wednesday.
First RaboBank’s FX analyst Jane Foley, who wonders if the Fed might be inclined to opt for a monthly QE target rather than overall total:
Surveys are suggesting that the Fed will today announce a plan to buy at least $500 bln of longterm securities over the coming months. It is possible that the Fed could instead announce a monthly target of around $50 to $100 bln without specifying a total.
The Fed hinted heavily move at the last FOMC on Sept 21 though during October expectations regarding the scale of asset purchases was scaled back.
It seems that the Fed has carefully been manipulating market expectations with respect to QE since September and this suggests that scope for a dramatic move in the USD on today’s announcement should be limited.
That said, the USD weakened yesterday into the meeting with the easing bias of the Fed emphasized by yesterday’s decisions by the RBA and the RBI to hike interest rates. Although EUR/USD could remain in a choppy range on a 1 to 3 mth view as peripheral Eurozone deficit concerns impact the EUR, we expect QE to feed further broad based USD weakness in 2011. The October high of USD1.4159 is likely to offer resistance on any upmove in EUR/USD today. Some USD buying was reported overnight as it became clear that the Republicans had gained control of the House.
While Republicans may be viewed as pro-business, Obama retains the power of veto suggests scope for strong direction from the US government over the next two years is limited. This suggests limited USD impact.
A wordy Marc Ostwald, of Monument Securities, meanwhile looks at the range expectations and asks if QE really serves any economic purpose?:
- The only real consensus on the Fed’s QE decision is that the pace is likely to be around $80-100 Bln per month, while estimates of the “up front” (initial commitment) centre around $500 Bln, though the range of forecasts varies from $250 Bln to $2.0 Trillion, though the latter high is double the next nearest estimate of $1.0 Trln.
It also appears to be certain that Mr Hoenig will vote against any increase is a foregone conclusion, and that Fisher, Kocherlakota and Plosser will also enter a dissenting vote when they become alternate FOMC voters in January, the question is whether there will be any other dissenters at today’s meeting, e.g. Mr Warsh, who has previously expressed concerns about the benefits vs. the costs of more QE, and indeed about the law of diminishing returns.
Beyond that, there is the issue of how “subject to review” at each FOMC meeting further QE will be, and indeed whether there might be any change of language on the rate commitment.
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We would continue to argue that just like so many of the more complex financial market instruments, there is a very large question about whether QE serves any real economic purpose.As suggested in Monday’s weekly preview: “one might add that seen from a real economy, non-financial market perspective, the benefits of more QE are unproven at best, non-existent at worst, and financial markets desire for more QE is an epic form of self-indulgence, which highlights many financial market participants’ apparent inability to comprehend what goes on in the real economy – however cynical a perspective that might appear to be.”
As one very obvious example of the failings of QE, we note that US corporates now have $1.0 Trillion of cash on their balance sheets, thanks in the main to the persistent “goal post” movement in the regulatory, legal arena by the Obama regime, which in turn implies that new initiatives to stimulate the US economy should clearly be along the fiscal and regulatory dimensions, and not in the monetary arena. Perhaps US policymakers will eventually reach the conclusion, one would hope that they do not give further credence to Winston Churchill’s observation: “You can always count on Americans to do the right thing – after they’ve tried everything else.”
Deutsche Bank’s Jim Reid and Nick Burns meanwhile suggest nobody really knows anything:
Your inboxes are no doubt full of strategists, economist, salespeople, traders and general market commentators providing detailed analysis of what the Fed is likely to do tonight at the end of their historic FOMC meeting. The honest truth is that none of us really know and much time will be wasted trying to second guess them.
Nevertheless given that our job is based around trying to predict the very difficult we’ll have a brief go at working out what they’ll say. After that we’ll also make some sweeping 40,000 feet comments on why QE is needed and some controversial comments helping work out how much may eventually be done. Overall given the disparate voices within the Fed we think the approach will be a balance between promising the potential for big action but committing less upfront and giving themselves lots of wiggle room to adapt to changing circumstances.
Maybe we should think Paulson’s famous bazooka here? A buy as you go policy but with lots of strong language about doing whatever it takes to generate sufficient growth and inflation to improve the outlook (employment especially?) is the most likely outcome in our opinion. It’s unlikely that the Fed will want to disappoint the market, and last week’s canvassing of opinion amongst dealers gives them a level of expectations to base their actions around. Overall expect slightly more than the market currently expects but with plenty of flexibility.
And Standard Chartered’s FX team envisage a completely open-ended QE programme:
Economic data have been mixed, with the ISM Monday surprising on the upside but GDP growth still below trend and inflation falling. We expect the Fed to announce an unbounded and open-ended quantitative easing programme (QE2). With a monthly Treasury purchase program of probably USD 80-100bn, (on top of the existing USD 30bn purchase) the Fed is likely to indicate that it will continue until economic growth moves sustainably above trend.
The open-ended nature of the program will leave markets uncertain about its eventual size and duration, but given the likely continuing sluggish pace of economic growth, we expect at least $1trn worth of purchases, spread over at least a year.
The duration of QE2 will be driven by how long it takes the economy to overcome the current headwinds, as consumers deleverage and the fiscal stimulus reverses. The more aggressive way to structure the programme would be to promise to continue purchases until inflation picks up (as Japan did in 2001, though the BoJ„s monthly purchase program was small). This is stronger than linking purchases to the GDP growth rate, because inflation would normally only pick up a year or so after growth starts running above trend. However, we think it doubtful that Chairman Bernanke will convince the FOMC to take this ambitious approach.
The Fed expects QE2 to work by keeping Treasury yields low, which ripples along the credit spectrum, cutting borrowing costs, raising asset prices and lowering the USD. In turn, lower borrowing costs and higher asset prices should stimulate spending via normal monetary transmission mechanisms. With QE2 largely priced in, the initial announcement could meet with disappointment. But in the longer term, continuing purchases and weak economic growth over the winter are likely to boost Treasuries and risk assets and keep the USD on the back foot. The euro (EUR) has gained more than 10% vs. USD since the start of September, while emerging market currencies have been under pressure to strengthen—particularly in Asia.
Who will be right? We guess we shall have to wait and see.
And as a reminder, tune in to our inaugural edition of FT Alphaville’s Macro Live later this Wednesday. We’ll be discussing the above views, and much much more.
Can’t wait!
Related links:
Wall Street to Fed: Here’s what we’re expecting on Nov 2-3 – FT Alphaville
Godzilla QE – FT Alphaville
The unsinkable unfalsifiable HMS QE2 – FT Alphaville