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SocGen: Tuesday's FOMC was "as good as it gets" for QE3 hopefuls
The FOMC statement out this afternoon went more or less as everyone expected it would. There was not much change in the Fed's rhetoric save for recognition of the fact that the economic data has been coming in better than expected in recent months (although economic surprise indices are now rolling over as well). As Vincent Reinhart -- who believes the chances of QE3 by June are still 75% -- noted after Ben Bernanke's recent visit to Capitol Hill, "stronger incoming data have been mostly ignored by the Fed." While there were slight modifications to the verbiage, the Fed's outlook on monetary policy was identical. A red-line comparison of the last FOMC statement with the one released today was posted earlier on ZeroHedge.
SocGen's take (all emphases theirs):
Pointing out that the housing market remains depressed and viewing unemployment as elevated, while at the same time rationalising away the imminent risk of inflation, the Fed leaves the door wide open for a QE3 announcement in April. But the immediate market reaction to the FOMC was muted, suggesting that the market has expected nothing less from the Fed. The Fed does not appear to be in the position to take any option off the table at this critical juncture of the economic recovery. Earlier in the day, retail sales figures surprised on the upside, pushing stocks higher. And yet, the US economy needs to be nurtured by the Fed to gain traction. The Fed is now expected by most market participants to err on the side of being too accommodative. Fix the economy now, worry about inflation later!
This confirms in our view that QE3 is coming.
As Jefferies recently pointed out, financial repression schemes have become a common tool in modern sovereign finance over the last century or so, and the FOMC's reiteration today that "economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014" is no exception.
SocGen questions the central bank's grasp on the whole interest rate situation:
10-year swap spreads are already trading below 7bp, down from 15bp at the beginning of the year and around 20bp six months ago. The risk now becomes that QE3 is already widely priced in (announcement effect), after which the actual announcement and its execution could actually lead to higher interest rates.
Where there are winners, there are losers. And one of the main losers of a Fed keeping the economy on life support for as long as possible is the (30-year) Treasury Long-bond. Following the Fed’s announcement, it dropped by almost one point. While the Fed may be able to keep a lid on inflation for three, five or even ten years, the prospect of inflationary pressure creeping up within the next 30 years cannot be ruled out. This is not a good set-up for Wednesday’s 30-year Treasury reopening! Caveat emptor!
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All this fixation on QE3 is kinda silly.
Look Treasury is spending $1.15 for every dollar it receives.
If that isn't stimulus on steroids....what is it?
This article strikes me as confirmation bias at its finest. But then again, everyone on ZH would be hating on this author if it didn't indicate that QE3 was coming. You see, QE3 has to be on its way otherwise half of these poor schmucks are going to lose their shirts in the PM market... or at least that's the groupthink conclusion you'll find around here.
Exactly.
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QE3 is achieving better results as "the carrot on a stick" than it ever could as an actual program. Not coming. Of course, now that I said that...
How about a moratorium on QE articles. Obviously the fed is buying up the planet.
Ha,Awesome I think it's great
Hey guys (& gals), it is an ELECTION YEAR!!! What the hell did you expect? Back before dirt when I got my MBA at Pachyderm U, I was assigned to read a dissertation written in The Precambrian Era by Barney Rubble (when Fred dropped him off every day at the corner he was actually sneaking off and auditing MBA classes at the Metamorphic Institute of Technology). It proved since FDR that spending rose notably in the 3rd & 4th years of every prez election cycle.
Plus ca change...
DC, I really enjoy your insight and have bookmarked your blog. Glad to see TD has brought you into the fold.
speaking of things which are well worth reading; http://www.professorfekete.com/articles.asp last couple of articles listed under popular economics. Very sound author, often expresses in one lucid sentence the essence of the situation. The basic thesis is; the dollar is going to take a dirt nap; but my god the edudition that's available here is massive; this is someone who actually knows how all the little wheeels fit together and why and he tells it like it is.
Many thanks for the kind words, Stax.
so no nasdapple 5000?? i so konfuzed....
DavidC,
Agree, he does not want a QE3. He wants to get his balance sheet under control and he wants to force the Congress to take an unvarnished look at the fiscal situation. As long as they believe he will monetize they will do nothing. His problem is that the economic numbers, in real terms, are touch and go. We have not achieved any escape velocity. And in terms of velocity, higher LT rates might generate some more bank lending but it is not clear the FED wants any right now. I think they want to get a few years of moderate growth with low risk of a roll over so that the housing inventory can clear, get turned over for renting, decay, torn down, etc. Another couple of years and the banks will likely be out of the woods and a new deomographic cycle will hit. This is what the "rates low until 14" is all about. If they get lucky and Congress and the President address the fiscal issues with simple fixes such as increasing the retirement age, adjusting SS and Medicare with an asset test, cleaning up Medicare & Medicaid fraud etc. the country could be off to the races again. In the next few years we are going to be a net exporter of oil and gas and if we move the trucking fleet and a portion of the auto fleet to NAT gas, look out.
You mention "escape velocity"; as tho it were some kind of financial term. Who are we going to escape from, ourselves? Surely you don't believe that "printing" a sufficient supply of new currency units will buy our way out of this mess, do you? If you do, you badly misunderstand the situation. We're drownding in un-payable debts; and in the process will be entertained by stagflation and other secondary effects.
uhhhh net exporter of oil..ummm... uhhhh..nevermind. I gotta buy more popcorn.
Yeah, it's weird isn't it. It's a person with a house and a computer; and they think we're going to be Net exporters of Petroleum Product. Enumerate, that's what they call it; like an illiterate can't read, an enumerate can't understand numbers.
Jesus F-ing Christ...............the Fed is keeping overnight rates at 0 forever. Some thing has got to explode (besides inflation) soon. This is fuck ing insane. I sense their is some serious unitended consequences that no-one can now predict from this. End of 2014 is still basically 3 years--------im bewildered.
Cash is trash. And still big companies wont invest it. Wonder why????
"Earlier in the day, retail sales figures surprised on the upside"
Bullshit. The S&P futs were up 0.8% all night long, way before the retail sales report was out. A very typical overnight Tuesday morning session that has NOTHING to do with reports not yet released.
Inflation adjusted retail sales are down year over year
I don't know. But nothing could be, or will be, now, more important than to always make sure you're dealing with de-inflated statistics; otherwise they're going to be completely misleading.
As good as it gets? Regardless of what Bernank says, QE3 will always be lurking in the bushes until it is implemented. Bernank could say, "No more QE," and no one would believe him. It's all they have left in the tool box (and, yes, twist is a form of QE).
I can't escape my own primitive interpretation that the anouncement of QE was intended to re-assure, at a minimum, certain elements of the population; in other words it was felt that the prublicity had value in itself; The QE they're doing right now, by "buying" bonds and making magic amounts of monetary unit appear in their client banks reserve accouint is just as effective; it's merely QE with out the news conference. They'll get to where they're predestined to go, as the city boy asked the farmer, where do you get to when you go down that road there? And the farmer replied, well, I reckon you get to the end of the road. The end of their road will be dollar taking a dirt nap; credibility and power and utility of their office utterly destroyed, and someone other than them in charge of doing something else.
Cursive,
I agree, other than another coordinated CB shenanigan like the 5 did at the end of November with the Fed basically providing unlimited dollar swaps, to me there are only two more bullets left; 1) another fed QE and 2) ECB flooring interest rates (bear in mind they're still around 1%).
I've said it before and I maintain it, Benny will NOT QE unless he HAS to, and that won't happen when you have happy happy stock market days like today (which I though I'd seen the end of for a while). Maybe this is the exponential phase before another crash (look at Apple, its movement reminds me of gold in the early 80s when it was at $880, everyone was piling in and then it fell big time). I don't think he'll QE until and unless the Dow is back to 10,000.
DavidC
@DavidC
Yes, the New QE is much like Bigfoot - talked about, but rarely seen. It's the new talisman for the Credit Bubble. Anytime we are in danger of falling back, there it will be, peeping through the CNBS studo windows and tickling Michelle Caruso Cabrera's backside....
...or fondling her boobage...
I must say i was quite surprised when the Fed forgot to include itself as "another bank that failed the stress test." Plus Fannie, Freddie, the Export-Import Bank, the World Bank, the IMF, the United Nations and the Bank of Hoojie-boojie-stan.
Yeah, well; what can you do. In my point of view, it was a serious oversight, of course. But no one ever notices the termites in their own foundation.