Thursday, September 13, 2012
The Fed announcement today at the conclusion of the two-day FOMC meeting will be the primary driver of the day’s trading action. Minutes of the Fed’s last meeting and pronouncements by key officials subsequently have helped build expectations that the central bank will announce a new round of quantitative easing program (QE3) today. This morning’s tame-looking wholesale inflation and weak jobless claims data will also be seen as confirming that expectation.
QE3 hopes have been a key driver of the stock market gains this summer, offsetting persistent weaker economic readings from all over the world. The Fed itself has helped build these expectations, by repeatedly assuring the markets that they stood ready to ‘do more’ should the economy remain weak. This was the takeaway from the Fed’s last meeting and also from Bernanke’s speech at Jackson Hole. Last Friday’s sub-par August jobs report further confirmed in investors’ minds that the Fed will come out with the QE3 announcement today given the upcoming elections.
In a survey of 47 economists in today’s Wall Street Journal, 72% expect the Fed to announce QE3 today. Bernanke had provided a spirited defense of the Fed’s unconventional monetary policy measures over the last few years at his Jackson Hole speech, by crediting the programs with economic growth and job creations. But many respondents in today’s Journal survey do not expect a fresh QE program to have any significant impact on the economy.
I agree with those who question the relevance of more monetary stimulus to the issues facing the U.S. economy. With interest rates where they are already, it is hard to imagine a jump-start for aggregate demand solely through a few basis points drop in interest rates.But we will see how things shape up in the coming days.
Sheraz Mian
Director of Research
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