The Consensus Moves Towards a QE3 Announcement This Week

This one’s been a long time coming.  And it finally looks like we might actually get the official word on QE3.  Analysts at several of the big research houses have now said this is the meeting where it’s going to happen.  JP Morgan analysts say:

“The debate about Fed action next week has been ended as a result of the weak August payroll report. Look for action on two fronts. The Committee will initiate a new round of asset purchases, with agency-MBS constituting some, if not all, of these purchases. The Committee should also push back its low-rate guidance from late 2014 to mid-2015, with this guidance possibly augmented to note that exceptionally low interest rates will be maintained even as the recovery progresses.

Such a statement would be a partial nod to the Evans rule. Although this is not our baseline view, movement toward an Evans rule—whereby policy is kept extremely easy until the unemployment falls below 7% as long as inflation remains below 3%—is likely to become the centerpiece of the next round of policy stimulus if the labor market remains soft as we turn into 2013.”

Goldman Sachs says:

“[W]e expect the Federal Open Market Committee (FOMC) to announce a return to asset purchases as well as a lengthening of the FOMC’s forward guidance for the first hike in the funds rate to mid-2015 or beyond at the September 12-13 FOMC meeting. Our baseline forecast is an open-ended purchase program, focused on agency mortgage-backed securities.

[O]ur “double punch” Fed call relates to the much-discussed study presented by Columbia University professor Michael Woodford at Jackson Hole last Friday. Woodford argues that forward guidance is a powerful tool both in theory and practice. But in his view the effect of asset purchases is largely confined to their role in conveying guidance about future monetary policy actions. …

We fully agree with Woodford’s view that such aggressive guidance measures could be a powerful tool. However, we also believe that Fed officials are unlikely to adopt them anytime soon.

Fortunately, we are somewhat more optimistic than Woodford with regard to the impact of Fed asset purchases. … we believe that a more moderate strengthening of the forward guidance coupled with renewed asset purchases could provide a decent amount of monetary easing next week.”

So it looks like the consensus is for more asset swaps and wishful thinking as to how exactly these asset swaps impact the real economy.  My estimation is not much.  But from a market perspective, it’s clear that the portfolio rebalancing effect and the psychological impact is very powerful so plan accordingly….


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Bond Vigilante

    What has the mouthpiece of the FED, one John Hilsenrath to say about QE 3 ?

  • Wulfram

    Not a good thing for the economy. Gas is already $4.30 a gallon in California. Who knows what some QE juice will do…

  • Quaternion

    Since the equity markets have anticipated QE3 at least since the early-June lows, I can’t help but wonder if its announcement would trigger a sell-the-news retreat instead of a rally.

  • Mike Bell

    I’ve seen the same speculation each time the Fed has moved, and I don’t think that has happened yet? Far from what many ascribe to the stock market (i.e. it looks ahead about 6 months), the stock market currently looks ahead about 5 minutes. lol. We are seeing quite a divergence between animal spirits in the stock market and economic realities.

  • http://pragcap Michael Schofield

    I’ve had that same thought but I don’t know how to play it. Maybe just keep my finger close to the sell button. I’m 35% invested but plan on adding this week, perhaps doubling exposure, have to see how things go. I think we’re headed higher however ill-advised that may be… I’m looking at banks, energy, retail, and small caps(IWM). Just a hunch but small caps may be due to catch up and when they do I may take it as a sell signal.

  • http://pragcap Michael Schofield

    Previous was supposed to be a reply to Quaternion.

  • REN

    Doesn’t it follow if somebody is holding an asset, i.e. a bond or some other vehicle, they don’t need “money.” I’m defining money here as velocity money , e.g. M1 type, where it is used to transact in the real economy. When money stops flowing, it wants to convert to another vehicle – we then tend to think of it as an asset, and it demands interest. The former asset holder will want another asset class.

    So, the FED creates digital dollars, and those dollars swap for an “asset.” Won’t the former holder of the bond type asset go shopping for another asset? It won’t necessarily create demand, but instead sector asset inflation.

    If there was a transmission mechanism where the government was deficit funded by QE3 and then they direct spent into the economy (bypassing private banks), then I could see it as demand. That outside “money” would then go on to de-leverage by paying down private debts. Outside money goes in, allowing the BSR to be paid down, and creates demand in its wake.

    Am I off base here, I’m not sure of the transmission paths?

  • EconFan

    I think you make a good point about bypassing private banks to get better traction for the money. Eventually – after the intermediary banks have taken their cut – the government takes the risk on mortgages, student loans, too-big-to-fail banks, inefficient markets etc. But as the recent student loan debate shows, entrenched financial interests will use the political process to prevent this from happening.
    Eventually the disruption will come from technology – like crowdsourcing, microloans and such.

  • Colin, S.Toe

    Seems like your analysis is pretty close to what PC has been saying about QE all along.

  • Andrea Malagoli

    It is sad that so much effort is being spent agonizing about QE3 with all the problems that the “real” economy is facing.

  • Anonymous

    I believe you condensed the essence of QE in a few words implicitly suggesting the real reason (and the success up to now) of the FED policy. The last thing which sustain the remaining “west world” dream (that is an expansion of the US dream) is assets value. If assets values implodes, so implodes the current system based on bank money creation (the latest posts were excellent, a great compendium, thank to all the participants). Inflated assets values sustain an endless chain of hypos and rehypos, the entire shadow banking system and 90% of the wealth of the true rich who have not vaults full of coins but inflated assets. Most of this richness is essentially an illusion.

  • Pete

    If we get QE of any sort, the stock market will be going higher again, which will almost ensure Obama re-election. Someone will be really unhappy. The Fed is in a corner, and there is significantly high risk at this moment.

  • Johnny Evers

    That’s how I see it, too. … The participants in this dream — the Fed, big financial institutions, the investing class, the politicians — are trapped in policies that continue this madness because they can’t look at the system from outside.

  • B Ferro

    There will be no more QE – the bank for central banks, the BIS, issued a manifesto here ( effectively signaling the need for CBs to shift to a stance of firm talk and conditionality vs. incremental policy stimulus.

    This is precisely what we have seen since that June report – words and only words.

    It doesn’t matter though – riks assets will continue trading higher anyway.

    The SPX specifically will trade higher until the Fed pushes its prospective forward returns to 0% or negative, which is their ultimate goal.

    Using Hussman’s rule of thumb that each quick burst of upside of ~10% reduces the forward 10 year annualized return on the SPX by 100 bps anuually, that suggests the SPX has ~20%-35% upside within the year depending on what your current forward annualized return estimate of hte SPX is (let’s say ~200-350 bps)…

  • REN

    By hypos and re-hypo I think you mean hypothecation of assets into new loans? So, the asset inflates due to QE3 allowing fake capital gains and a “refinance” so to speak.

    Asset inflation is seen as Capital gains, and said gains are rolled into the new loan. I believe Minsky calls this the Ponzi cycle of Financial Capitalism. When the real economy cannot keep up with the exponential claims, the princicple is not paid down anymore, it is rolled over adding debt claims onto the real economy.

    If QE3 is just an inside money swap, with no outside deficit spending counter by the Government, then it may also make hot flows of dollars going overseas to seek assets in the “dollar” zones. That is likely to irk our overseas friends, and puts dollar “reserve” status at risk. Government should know that there is a large strategic risk to losing dollar as reserve.

    In other words, our Government could soak up QE3 money by trading their newly issued TBills for new FED digital dollars, and then spending as demand money on the organic economy. (Yes, new TBills are sterilized in the market, but eventually they remove the FED’s add to the money supply.)

    It would be especially good if deficit spend changed the shape e.g. reducing private debts in the household sector.

    But, it seems we aren’t doing that.

  • GreenAB

    i´m surprised and amused how the market is talking itself into a QE3 consensus.

    lets look at the facts.

    stock market near multiyear highs
    housing market bottomed
    inflation above 2%
    consistent NFP prints around 100k
    service pmi comfortably above 50

    DRAGHI does the dirty stabilizing work in europe
    elections coming up
    oil, gasoline prices

    why in the world would they fire a precious bullet right now?

    they also know that EXPECTATIONS for QE (and not QE itself) is what keeps treasury yields low.

    imo they will do nothing but talk.

  • Anonymous

    When people are comfortable, they will spend endless hours talking pure shit….it is human nature….

  • Nephric

    Good analysis, GreenAB.
    I would add the ‘fiscal cliff.’
    Why would the Fed do QE when that uncertainty about next year’s taxes is curtailing CEOs enthusiasm for spending and for hiring?

  • Anonymous

    Yes REN I perfectly agree with you. This is a very subtle and dangerous Ponzi scheme refinancing that can go on for much longer than a simple mind can expect. Infact, the potential alternative reserve currency, the euro, has lost his credibiity and will not regain it for the next ten years. I don’t mean that the euro was attacked for this, it’s really a bad engineered currency. Other alternative currencies are not in view, the chinese economy is also a giant Ponzi scheme of a different kind. So we’re witnessing a general and slow loss of faith in any kind of fiat money not because is fiat but because it’s the expression of governments that are unable to solve the problems. So we’re witnessing the resourgence of barbaric relics like gold not because is a viable alternative but because of a a general failure of our system. I believe the most probable medium to long term exit to this situation is some form of modern techno fascism in many western countries, US included.

  • Jim

    That’s a pretty intriguing document. I thought it was fascinating that the BIS is reminding central bankers of the toll that accommodation is taking on emerging economies. A reminder that “the left hand giveth, while the right hand taketh away.” If they’re inflating assets by merely chatting it up (and they have), why draw from their dwindling supply of policy tools?