Why QE3 Isn’t Coming This Week…

I haven’t quite digested my thoughts completely on this one, but I’ll leave you here with the other side of the coin from our earlier post.   Joe Weisenthal of Business Insider offers the 6 reasons why QE3 isn’t coming this week:

Our guess: The crowd is right, and that we’ll only get a change in language, but no QEIII.

Here’s why:

  • The economy still appears to be getting better. Citi’s Economic Surprise Index has gone positive, and continues to rise.
  • Unemployment fell to 8.1%. You might say this is meaningless, since it was a result of people leaving the workforce, but that doesn’t change the fact that if the workforce is shrinking that rapidly, then the labor pool is marginally closer to full employment, thus creating inflation risk. The Fed might also wonder (as others have) whether the weak NFP number was the result of a bad seasonal adjustment, rather than an underlying reflection of the economy (other labor market indices were quite solid during the month).
  • Meanwhile, the ECB just did the #1 thing that was needed for the global economy by taking the tail risk off the table with its bond buying program. That’s FAR more important and impactful than anything the Fed could do right now.
  • In the post Michael Woodford-era (Woodford being the economist who advocated NGDP targeting at the recent Jackson Hole conference), the Fed might feel as though a language change is the more robust move it can make.
  • The bar is probably high due to the electoral scrutiny. Easing in December will be much more palatable, and the Fed will also have more clarity as to how the Fiscal Cliff will be resolved.
  • Asset prices are at multi-year highs, and again, with the help of the ECB, financial conditions are quite easy.

What’s your guess?  Feel free to discuss….


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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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  • Wulfram

    No joy. Markets will sell off, and QE 3 will hit in December regardless of who becomes the next president.

  • Rafael Barbieri

    I really can’t see it happening either. It seems that a new program is not the expectation among traders/investors (most likely a misperception of mine). Could you imagine the short squeeze if the Fed did announce something?!

  • http://None Pete

    I think if there is QE in this week, market will go up. Romney will be doomed at election. Election is the single most important reason. Others can wait. I see No QE this week. It also takes a few weeks for the market to affect the sentiment and ballot box. Romney is running out of time.

  • Alberto

    Look at the current market. It is extremely thin. This could mean that a lot of this spectacular growth in valuations has been engineered. With the derivative books as opaque as the bottom of the ocean it’s conceivable that a consortium of big operators can manipulate the market at will. This could also mean that as long as the market is thin, the volatility will be at record low and valuations can be sustained well above the fair value for long time.

  • Ville

    Bill McBride expects QE3: http://www.calculatedriskblog.com/2012/09/analysis-i-expect-qe3-on-sept-13th.html.

    I think QE3 would be a mistake because there wouldn’t be any substantial wealth effect because SP500 has already been performing so strong.

  • EconFan

    For an aircraft trying to takeoff, risk of stall is a bigger concern than overspeeding or fuel efficiency. Economy has complex and non-linear linkages and a stall would have disastrous consequences. So leaving politics aside, Fed’s decision is not that hard. But effect will be much smaller than addressing the fiscal cliff.

  • Anonymous

    Romney could win……. Geithner and Bernanke will be toast. That will rally the market.

  • http://pragcap Michael Schofield

    The fed has traditionally offered its support during presidential election years, and Bernanke got everyone’s hopes up. How much the fed will do is hard to say but it has to do better than a token at this point.

  • DR

    The market is already pricing in QE3. If the Fed says no, then you will see a profit taking sell off as very few traders trust the month of September. Net of any unforeseen disaster, the market will then stay flat until November election day.

  • anon

    Are the Feds truly independent? Even if we give them the benefit of the doubt, wouldn’t acting aggressively so close to a Presidential election helps cast the vote for the incumbent? With the S&P at a high level, economic data while worrying, is more mixed than downright contracting and ECB has already bit the bullet to remove the tail end from the EU crisis…. does it warrant Feds sticking its nose in with QE3? The first two QEs happened after big decline in S&P… doing one now, 2months to election and risk higher oil/commodity prices to further hurt consumer spending? How would that not be portrayed to be political to help Obama win his re-election?

  • SilentKz

    How will Geithner and Bernake going rally the market? I think it would do the exact opposite, especially since Romney would appoint someone more Hawkish in Bernake’s place.

  • http://pragcap Michael Schofield