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Tuesday, January 08, 2013

Question #6 for 2013: What will happen with Monetary Policy and QE3?

by Bill McBride on 1/08/2013 01:35:00 PM

Earlier I posted some questions for this year: Ten Economic Questions for 2013. I'll try to add some thoughts, and maybe some predictions for each question.

Note: Here is a review of my 2012 Forecasts

6) Monetary Policy: Currently the Fed is planning to buy $85 billion in Treasury and agency mortgage-backed securities per month as part of the open-ended QE3. Will the Fed continue all year at this pace? Or will the Fed increase their purchase rate? Or will the Fed decrease their purchase rate, stop these purchases, or even sell some securities?

First - I wrote this question before the recent FOMC minutes were released. The minutes revealed that several FOMC members expect QE3 to end in 2013. Of course the level of QE3 purchases in 2013 will be data dependent - if the economy remains sluggish, the unemployment rate remains high,  and inflation expectations remain stable, the FOMC will continue to purchase $85 billion per month all year. If the economy picks up, or inflation expectations increase - the FOMC will probably slow or stop their purchases.

It is important to note that slowing or stopping the purchases doesn't mean the Fed is tightening. Policy will remain accomodative all year (I doubt the Fed will purchase securities and reduce their balance sheet in 2013, and it is very doubtful they will raise the Fed Funds rate this year).

Last year I wrote for 2012:

• I expect the Fed will change their communication strategy and add a likely future path of the Fed Funds rate to the quarterly economic forecasts.

• I think QE3 is likely, but more towards mid-year - and [timing] is data dependent.
The Fed introduced the new communication strategy, and then changed it again based on "thresholds" near the end of 2012.  On QE3, they waited a little longer than I expected, and the FOMC announced QE3 in September.

This year I don't think we will see as many monetary changes.

I expect the FOMC will review their purchases at each meeting just like they used to review the Fed Funds rate.  We might see some adjustments during the year, but currently I expect the Fed to purchase securities at about the same level all year.

Here are the ten questions for 2013 and a few predictions:
Question #1 for 2013: US Fiscal Policy
Question #2 for 2013: Will the U.S. economy grow in 2013?
Question #3 for 2013: How many payroll jobs will be added in 2013?
Question #4 for 2013: What will the unemployment rate be in December 2013?
Question #5 for 2013: Will the inflation rate rise or fall in 2013?
Question #6 for 2013: What will happen with Monetary Policy and QE3?
Question #7 for 2013: What will happen with house prices in 2013?
Question #8 for 2013: Will Housing inventory bottom in 2013?
Question #9 for 2013: How much will Residential Investment increase?
Question #10 for 2013: Europe and the Euro

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