Monday, March 26, 2012

Comment: QE3 Remains Likely

by Calculated Risk on 3/26/2012 01:22:00 PM

I still think QE3 is likely around mid-year. Fed Chairman Bernanke's comments this morning that the "job market remains far from normal", and that he views the high unemployment rate as cyclical, not structural (I think this is obvious), suggests the Fed remains ready to take more action.

The next two meetings of the FOMC (April 24th and 25th, and June 19th and 20th) are both two day meetings. Although the Fed remains data dependent, I think they might hint at further action in April, and possibly announce QE3 in June.

From Kristina Peterson and Jon Hilsenrath at the WSJ: Bernanke Notes Labor Market Concerns

Federal Reserve Chairman Ben Bernanke said low interest-rate policies were needed to confront deep, continuing problems in the labor market.

The comments run counter to a view that has emerged in financial markets recently that the Fed is preparing to back away from its low-interest-rate policies. ... Mr. Bernanke's comments indicate that his own views about policy haven't shifted as much as the markets have in recent weeks.
Mr. Bernanke avoided trying an answer another question: Whether the Fed will launch another bond-buying program, known to many as "quantitative easing," to push long-term interest rates even lower. The Fed has clearly left the door open to another program, but hasn't made any decisions on whether or how to proceed on that front. Mr. Bernanke's comments Monday suggested another round of bond buying is still on the table if the economy slows or unemployment starts rising again, but it's not a sure thing.
Goldman Sachs economists wrote in early March:
We expect that the Fed will ultimately announce a return to balance sheet expansion sometime in the first half of 2012, likely including purchases of mortgagebacked securities (MBS).
At the same time, Merrill Lynch noted:
In our view, it is wishful thinking to believe the Fed will do QE when the data flow is healthy. We expect renewed QE only after Operation Twist ends in June ... only if the economy is slowing ... Under our growth forecast ... QE3 comes in September.
If the economy slows, and key inflation measures start falling again - then QE3 remains likely. But right now, with most data somewhat better than expected, and inflation a little higher than the Fed's target, the Fed is still in "wait and see" mode.

If we look at the most recent projections, the unemployment rate has fallen a little faster than expected, GDP has been a little stronger, and inflation is a little higher. My guess is the decline in the unemployment rate will slow, and inflation will ease - so I think QE3 remains likely around mid-year.