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Probability Map: Morgan Stanley's Vincent Reinhart still says 75% chance of Fed QE3 by June
Newsflash: the Fed controls the economy. It's working on financial markets. Former Fed official and Treasury put-master Vincent Reinhart, who is now the chief U.S. economist at Morgan Stanley, says the only way QE3 doesn't happen is "if the economy surges or equity investors continue to embrace risk," in which case "the Fed would cheerfully keep its plans on the shelf." The only problem is it looks like we just had the "surge" and it didn't seem to impress the Federal Reserve, and every time they try to exit a buying program, the market tanks.
Reinhart sees either a $500-700 billion round of QE3 or a second Operation Twist if they decide they want to act faster:
[OT2] could stretch purchases out until the end of the year, implying total new purchases of about $400 billion, and include MBS as well as Treasuries. OT2 would allow the Fed to act sooner, say at the March or April meeting, and frame the initiative as support for the ongoing economic expansion. It would also buy some insurance from criticism by keeping the overall size of the balance sheet unchanged.
In short:
Given Reinhart's CV, these comments on how the Fed is plainly ignoring the pickup in economic activity we've seen in the last quarter in the U.S. are incredibly suggestive:
Stronger incoming data have mostly been ignored by the Fed. There was almost no mention of favorable readings on activity and the labor market in the Fed’s public statements earlier this year. Only late in the game, with the semiannual testimony to Congress, did Chairman Bernanke devote much attention to employment gains. No doubt, it would have been awkward otherwise to review economic developments over the past year without noting that the unemployment rate has fallen 3/4 percentage point. Even so, the Chairman’s reminder that “...the job market remains far from normal...” seemed to be the main takeaway. The Fed either does not accept that the pickup in growth will be sustained or does not want market participants to get carried away in connecting the last few data points.
Morgan Stanley has been calling for a slowdown since the beginning of the year based on inventories data and unsustainable employment trends, which informs their QE3 call. Reinhart notes the Fed is actually seriously concerned about the effect the eurozone crisis will have on the United States:
Every Fed statement frets that “...strains in global financial markets posed significant downside risk to the economic outlook.” Deep down to their free-market bones, Fed officials are mostly Euro-skeptics who have trouble convincing themselves that a flawed currency union will survive. A general piece of advice from Fed economists working on the policy challenges posed by the zero bound to the nominal funds rate is that it is best to front-load policy accommodation if there is a significant risk of an adverse event. That way, the economy is on a stronger footing if the blow does strike. The political calendar makes this insurance motive more important: Since the Fed likely wants to keep a low profile during the height of the campaign season, it should be quicker to act in the first half in anticipation of adverse shocks.
Reinhart defends the QE3 call, mentioning some "off-kilter" objections that he has to shoot down literally "whenever we are asked them." These are "reasons we are not wrong."
1) Doesn’t the Fed need to see a fall in economic activity before it acts? Reinhart:
What matters is the explanation earlier in the minutes that is limited to the ten voters. There we learned that a few members thought current and prospective economic conditions could warrant action “before long.” Other members would support this if “...the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate...” In minutes math, a “few” plus “others” is likely a majority. Note that the first trigger only requires a slowing in economic expansion and that the second is already met in their published forecast.
2) Here is a good one: doesn’t the recent run-up in oil prices take Fed action off the table? Reinhart:
Chairman Bernanke’s academic work on the strong post-WWII association between energy price spikes and subsequent recessions puts part of the blame on the Fed’s historical response. As long as inflation expectations are well anchored, the strong conclusion is that the central bank should ease policy to counter the blow to aggregate demand. Thus, the recent rise in oil prices and the risk that they go higher likely inclines the Fed to do more, not less.
3) And finally, the world over: how can Fed officials believe that further balance-sheet manipulation would work? Reinhart:
It is their job. The Fed wants to be seen by the private and public sectors as willing to act when there is a need. For households and firms, QE3 or OT2 might boost confidence. For the rest of officialdom, the Fed would show that at least one institution in Washington DC retained a sense of purpose.
That's good, because they were starting to worry that the Fed hadn't "retained a sense of purpose" lately.
Recent articles:
Soc Gen: LIBOR dispersion surging post-LTRO, funding conditions "may not be as healthy as they seem"
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so if the current currency debasement isn't QE3, what is it?
The closer we get to November the more distractions attempted to distract people from the crappy economic news. Smoke and Chaff, street theatre, lies, and stuff. By the time September rolls around Obama will be lighting his farts for a distraction.
the Fed has not stopped their pumping since 2008, just not telecasting it to the plebs.
This stuff can go on for a VERY LONG TIME. Think about it. Big corps are borrowing dirt cheap and using some of proceeds to keep their stock prices up. Most corps had good balance sheets before '08 so can do this for a number of years.
At ZIRP, our government can continue to borrow with minimal impact on interest expense.
So the only thing that is getting worse is the federal debt. Now even that can be jawboned for a good while longer. They'll point to Japan at 200% debt/GDP and say; hell we're at 1/2 of that, what's the problem! Of course, once Japan starts to tank, then that argument can be turned against us. And Japan will tank.
Kyle Bass pretty much has the scenario nailed. He predicts Japan in a couple of years and the US in 5 or so years, I seem to remember. Maybe about right but could also be off a couple of years too soon. So all of this could go o n for another 5-7 years in the US, barring some exogenous event that would result in loss of faith earlier.
Miker, good point. It can go on, its a miracle they've slowed everything down thus far, despite the drama of being on the highs here, for all the news and uncertainty we have had very orderly markets. I have absolutely no idea what will happen, other than massive rule changes that continue to protect and expand banking interest...
I agree with the authors premise. It's an election year, and in the un-likely event that a Republican gets elected, it will be with a mandate to straighten out the financial mess, and Bernanke wil get fired so fast he won't have time to say "goodbye". I expect all the usual blandishments and handfeeding we've seen in the past in election years, and then some.
a rose is a rose no matter what the name
so callling for a q-3 is if it has not already happened is like calling a rose a twig
It will actually be QE 6 maybe 7, we have already had QE3 2 years ago.
what matters now is will there be "QE one more time" or "QE forever until double digit inflation"
either way superelites control whitehouse, whitehouse controls the Fed, Fed controls the economy and banking, banks control corporations, corporations control workers.
Treasury Yield is still 3+%. Fed has 20 more years at curent rate until hitting 0. That's when Chinese will take over. only wildcard is US to back up Trillions of debt in US Treasuries with oil by invading persian empire called Iran.
Can't you hear the war drums being beaten?
No action if sizeable equity rally and employment gains - 1 in 4...
Define "equity rally", please include timeframe, and actual verifiable rise in value needed to achieve "sizeable".
Define "employment gains" in terms other than a "fast decrease in unemployment", i.e. a rise in the percentage of people actually engaged in productive labor.
Let the pillaging continue.
A multi-thousand point rally off the lows all from liquidity, rising employment numbers thanks to lies. Nope, sorry FED you bullshited your way right out of QE3.
I'd be surprised if the assholes didn't announce it BEFORE the market tanks.
Then again this might be another one of those "special" news announcements that keep this overpriced fucking garbage afloat on mere rumor.
on one channel there is Obama, defending the growth in the economy. on the other channel there is Bernanke doing the Twist, and saying that economic growth is not sustainable. now if HSA censors the networks down to one channel, it just might work.
I think that the probability of more QE depends on whether economic activity falters again or not, if it does as I expect it will due to Europe, China, Iran/Israel/Syria, USA, then it is 100% given what I have indicated before http://www.zerohedge.com/contributed/2012-09-04/investor-sentiment-get-p... , the FOMC represents the parents in an addict/parents typical situation, and the Congress/President/Public represent the addict. The addict keeps on manipulating the parents into providing more resources to satisfy his addiction. Until the addict receives the help he really needs, and finally understands that he needs to stop his addiction, the parents will keep on providing, only making the situation worse for them and the addict.
The key question here is who is guilty of this psychotic behavior? The addict who is trapped and unable to handle his addiction? Of the people that provide the resources for the addict to continue on his downpath to dementia?
You decide who is the guilty party and DO WRITE TO THEM and please ask them to consult with a psychiatrist asap!
Until next time,
Engineer
No QE until after election. That's all they got. They aren't going to give it to the incumbent/newly elected without him groveling. Politicians and bankers are like rival mobs most of the time it makes sense to work together or stay out of each others way, sometimes you have to show who is boss.
Read Point 2! Ben is a REPROBATE-One who is incapable of salvation.(Policy wise). These ingnorant fools will never stop until we have a hyperinflationary collapse. Then they'll say no one could have seen it coming.
Most of the Fed will escape on private jets.
The rest of us will be in locked mortal combat with people whose welfare checks don't buy anything.
DOOM
QE3 or OT2 - yes, great confidence they will. Go ahead you dicks, destroy the whole frigin system. Destroy the wealth of the retired, starve the young, impoverish their minds. Even in the 80s Econ 101 still discussed the societal choice between Guns and Butter. There was still the capacity to pay interest then.
Credibility of the Fed? Zero, zilch - dying grasping gasps of a failed kleptocracy. Do psychopaths ever evaluate the costs of their actions?
An absolutely pathetic display of power to drive down the price of gold while testifying. Really pathetic. "Look at how much paper gold we can sell while I'm talking to congress, see how much power I have?" How friggin impotent a display is that? pfffffttttttt.
"Chairman Bernanke’s academic work on the strong post-WWII association ..."
benshit is a legend in his own mind.....he is a quack....
Vince along with Bernanke are true believers in that the only way to survive a deleveraging phase to to keep long term nominal interest rates below nominal growth for a very long period of time and to devalue the currency. Only problem is that the whole world is in the same boat. Got gold?
If the Fed acts or doesnt act the result is the same, the market breaks. Only question will it be up or down?
When everyone at the table knows the casino is broke who will be the first to cash out and leave?
Free drinks are the only way of keeping the game going.
This can't go on forever.....
Yes but, does Vincent Reinhart own a pen knife and take cab rides like his colleague W. Bryan Jennings?
Indications you might be a psychopath:
That's great; I love it. He's gonna stab the cabbie over a $204 cab fare; Sounds like a Psychotic to me.
Correct me if I am wrong, but isn't fucking ZIRP essentially QE, just not for you and I?
That barbaric yellow metal looks better and better all the time.
Looking more barbaric by the day! /sarc
Makes one wonder if the banksters DB, JPM and the Koch Bros solder their tankers of oil yet.
Yes, great. Now if only MS can precipitate that 30% drop in the market (and crude, because a run up in Brent to justify QE3 is about the dumbest thing to ever come out of the guy who came up with the idea to sell Treasury puts on behalf of the Fed) needed to greenlight QE3 post haste. Or did Vince forget that there are about 6 other central banks that did Ben's job for him in the past 4 months?
As I've posted a few times (including this morning) my wager is that events in Greece and/or Iran will be blamed for a sudden and dramatic sell off in the coming weeks. This is a perfect scapegoat and will let the Fed ride to the rescue again in June.
Ben has to finance the growing US debt - only exacerbated if China or even Japan sells ever more T-bills. The race to debase will be with us for years - and the Fed has its running shoes on...
TYler, I find this whole concept of no QE3 as laughabale. Who is buying 90% of the US debt and with what? There is no distinction in confetti. Confetti is confetti if used for Stimulus or for buying debt.