Technically, there may never be a QE4 because of QE3 (QEternity) lasting until the Fed sees the market “improve substantial”. September’s FOMC report states: “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.” (Federal Reserve)
This means the Fed could keep purchasing for decades, whatever they feel like doing. What ever happened to accountability? Moving on…
The Fiscal Cliff is less than three weeks away. Fast approaching, the White House is anxiously trying to agree on a solution to handle the coming disaster that could lead America into another recession. Recession is the projection of many economists, “economists warn the impact of the fiscal cliff could cause another recession”. (CNN)
Federal Reserve Chairman Ben Bernanke will likely feel a lot of weight on his shoulders during the FOMC meetings that started Tuesday. With the pressure to do something, it’s widely expected that additional stimulus will be announced. The October FOMC report made it clear that “a number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity extension program”. The maturity extension program (Operation Twist) ends at the conclusion of 2012. If further stimulus isn’t announced tomorrow in the meeting minutes, it is very highly likely that more stimulus will be announced in the next FOMC meeting, the first of the New Year.
“Forty-eight of 49 economists predict the Federal Open Market Committee will purchase Treasuries to bolster an existing program to buy $40 billion in mortgage bonds each month.” (Bloomberg)
Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. said “It’s going to be massive and open-ended in size,”. Not only more stimulus, but massive amounts of it.
The most concerning quality of QE3 is not that it is massive, but rather that it is open-ended. It could literally go on for decades, there is no set goal, it is all up for interpretation. A goal without a plan is a fantasy but a plan without a goal is insanity. I do not think that any stimulus type program will bear fruit long-term and there is no proof of evidence suggesting otherwise. The Fed has lost it’s options, interest rates could hardly get any lower, they are in a corner with the White House and the public blaming them for the economic situation, and there is nothing left to do except “quantitative easing“. Therefore, it appears like they are doing something, working hard, but it may just be a show.
The U.S. dollar is currently experiencing weakness in the market. As the fiscal cliff approaches, it is very possible for Risk Aversion to kick in, at least for a few months, before Dollar weakness is exponential. Risk Aversion is when people invest in secure assets in times of panic, even if the asset’s environment is suffering. That is what we saw in 2008 when the dollar made incredible gains in the Forex Market.
I’d love to hear your thoughts on the current fundamental situations and how you believe they will affect the market.
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