By EconMatters, Aug. 22, 2012
The Fed Minutes are from the July 31-August 1 meeting, this was before they latest run-up in asset prices. For example, WTI was $88 dollars a barrel then, now it is $98 and with the new asset prices any QE3 thoughts have now been priced out of the market. In short, the Fed minutes from three weeks ago are outdated. There is no way with eight dollar corn prices and 4 dollar gas that the Fed does any major QE3, just forget that notion.
Chart Source: US EIA, August 22, 2012
The very run-up in asset prices has in essence precluded the Fed from being able to act, prices and inflation are too damnhigh to do any material actions now. So the bulls can start re-pricing this fact out of the market or they are going to be severely surprised when no major QE3 initiative comes down the pike.
Talk about putting the cart ahead of the horse. The bulls have taken and ran with a far- fetched notion that has a very low percentage of occurring right now. The old trade of buying the rumor and selling the news is actually backfiring this time because of the run-up in food, oil and gas. The Fed`s hands are now tied on this one even before they got a chance to do anything.
Chart Source: FT.com, August 22, 2012
Expect some market signals that no QE3 will be coming in next week`s Jackson Hole speech. The rise in commodities will be mentioned, and this is the signal for NO QE3 of major proportions. Sure, Bernanke may throw the market a bone, but that`s about it! This is an election, and the last thing Bernanke, Obama, or any politician in office wants is high food and gas prices.
As usual the market`s first reaction is usually wrong, then they think harder about the issue and then take the other side. Bernanke got so much criticism the last two QE initiatives over high food and energy prices; well they were lower when they were entertaining the idea. But this latest run-up has pushed these commodities higher than they were during the other QE initiatives in the case of Gas prices and food prices.
In short, there is no room for Bernanke to move on this one, he is effectively boxed in, and eventually the market will get it, but they are pretty dumb most of the time. They usually have to be beaten over the head with the concept of $12 corn and $5 gas before they get a clue that this would instantly get Obama fired, Bernanke kicked out of office, and send the Global economy straight into a nasty recession.
You think China is having a hard landing now, just wait what QE3 would do to their fragile economy. If a QE3 initiative would be implemented, there would be an initial spike in commodities, then the side effects would push the Global Economy over the ledge, and ironic enough you will not be able to give commodities away.
You think Europe can handle high energy prices right now? Forget about it, half the Euro-zone is in a recession right now! Can you say Food riots in China? Nope, Bernanke and crew would have to be the dumbest Fed in the history of Fed governance on monetary policy.
Even if they were that stupid, there is no way Obama would let them self-destruct his seemingly locked bid for a second term. That`s the ticket for winning an election have run away food and energy prices right during the home-stretch of the campaign.
I don`t think so, these are smart people. They may make mistakes from time to time, but this is a NO Brainer given the run-up in gas prices since the last Fed Meeting. It doesn`t take a PHD Economist from Harvard to recognize that things have changed since they last met and discussed the issue, namely asset prices have risen dramatically.
Therefore, given the fact that environmental conditions have changed, this completely changes the data that they put into the equation regarding possible QE3 policy, and the new data effectively eliminates even the bandwidth available to maneuver here in regards to loosening policy measures. The start of both QE 1 & 2 had much lower starting points for commodities in the form of food and energy prices. This was after major market sell-offs, but the exact opposite has occurred this time as markets are in the midst of a humongous rally in Risk On Assets.
In short, the conditions are dramatically different from the first two QE initiatives in regards to Pre-Conditions or available flexibility to undertake an asset raising initiative which is emblematic of these types of monetary tools.
Nope, there is no way in hell with these current asset prices that QE3 is anything other than a major letdown for markets. Expect the Fed to start signaling the markets of this case starting next week.
Further Reading - Bernanke's Dual Mandate Trap