FOMC Preview - Rate Extension But No NEW QE

Tyler Durden's picture

The Hilsenrath-Haggle Federal Open Market Committee (FOMC) is likely to ease monetary policy at the July 31-August 1 meeting in response to the continued weakness of the economic data and the persistent downside risks from the crisis in Europe. While we expect nothing more exciting than an extension of the current “late 2014” interest rate guidance to "mid-2015", Goldman adds in their preview of the decision that although a new Fed asset purchase program is a possibility in the near term if the data continue to disappoint, their central expectation is for a return to QE in December or early 2013.


Golman Sachs: FOMC Preview

Q: Will the FOMC ease monetary policy?

A: Yes, we expect the Federal Open Market Committee (FOMC) to ease at the upcoming July 31-August 1 meeting. The FOMC decision will be announced at 2:15pm on Wednesday August 1, and there will be no post-statement press conference.

Q: Why?

A: We see three reasons.

  • First, the economy has lost further momentum since the June 20 FOMC meeting. Real GDP growth printed at 1.5% (annualized) for the second quarter and the June CAI presently stands at only 1.3%. Information received so far for July (including surveys of regional manufacturing and consumer confidence) has generally remained weak and expectations for the main indicators to be released this week (including payrolls and ISM) are subdued.
  • Second, a decision not to ease is tantamount to a tightening. The reason is that the impact of unconventional easing--unlike that of conventional short-term interest rate policy--"decays" over time. We estimate that this "decay" would push up the 10-year Treasury yield by about 30 basis points (bp) between now and the end of 2013 if no further easing is provided. Fed officials have expressed a similar view.
  • Third, the FOMC expressed a clear easing bias in the June 20 FOMC statement, noting that "…[t]he Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability." Fed communication since then has generally reaffirmed openness to additional easing. Although Chairman Bernanke's prepared remarks at the semi-annual Humphrey-Hawkins testimony were noncommittal, he provided a list of easing options during Q&A and said that easing would depend on whether there is "a sustained recovery going on in the labor market or are we stuck in the mud". San Francisco Fed President John Williams, for example, said recently that "the pace of growth has been frustratingly slow" and that Fed officials "stand ready to do what is necessary to attain our goals of maximum employment and price stability." Recent press reports--including pieces by influential journalists at the Financial Times, Wall Street Journal and New York Times --have likewise suggested that additional easing is likely in the near term.

Q: What are the options?

A: Chairman Bernanke described a "logical range" of four monetary easing options at the Humphrey-Hawkins testimony, including 1) another round of asset purchases focused on Treasuries and/or agency mortgage-backed securities, 2) use of the Fed's discount window for lending purposes, 3) changes in communication regarding the likely path of interest rates or the Fed's balance sheet, and 4) a cut in the interest rate on excess reserves (IOER), currently 0.25%.

Q: How will they ease this week?

A: We expect an extension of the current “exceptionally low…at least through late 2014” interest rate guidance to "mid 2015." Such a shift would roughly restore the forward guidance to the same three-year horizon as at the January FOMC meeting, when the "late 2014" formulation was first adopted. We would, however, regard this rate extension as a relatively modest step. Specifically, our estimates suggest that this might be worth 5-10 basis points on the 10-year Treasury yield and at least some of this appears to be already priced in.

Q: Why not do more now?

A: We see three reasons.

  • First, Bernanke noted at the last press conference that the extension of Operation Twist was a "substantive" easing step (our estimates suggest that it is roughly 3/4 as large as QE2 or the original "twist" in terms of the amount of fixed income duration that will be removed from the private sector) and that unconventional easing steps "by their nature…tend to be lumpy." This would suggest that renewed balance sheet action is more likely at a time when the prior program expires, namely at the end of 2012 rather than now or in September.
  • Second, while the economic data suggest that additional easing is warranted, financial conditions send a different message. Our GSFCI has generally eased in recent weeks and now is back to the levels of early April before the most recent bout of Euro area turmoil. As a result, our statistical model of meeting-by-meeting Fed policy says that the probability of an easing step this week is only around one-third. We would not necessarily take the model as a literal guide--as we do expect a small easing step this week--but this does suggest that the recent easing in financial conditions is an argument against expecting a big step this week. (What complicates the use of mechanical models, at least in this case, is that the improvement in financial conditions is clearly due at least in part to the anticipation that the Fed will ease.)
  • Third, we continue to expect some improvement in the dataflow towards our forecast of a 2% growth pace in the second half of this year. In addition to the easing in financial conditions, these include the end of temporary drags (including payback for the warm winter and possible seasonal adjustment distortions), continued housing recovery and a pickup in real disposable income growth.

Given these factors we expect Fed officials to announce additional asset purchases at the December meeting or in early 2013. But an earlier return to QE is certainly possible--especially at the September meeting if the data do not improve in line with our expectations.

Q: How about the other options?

A: We believe that Fed officials are unlikely to make use of the other tools on the Chairman's list any time soon.

  • First, we judge that the committee views the forward guidance as a better way of mitigating upward pressure on short-term rates than a cut in the IOER because it seems less likely to interfere with money market functioning.
  • Second, we believe that a "credit easing" program would be relatively unattractive in practice given that (1) the cost of funding for US banks is already low, so the incentive for banks to increase lending would be reduced; and (2) given political and regulatory scrutiny, banks may be wary of participating in such a program.

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jomama's picture

ZIRP till the wheels fall off, bitchez

SilverTree's picture

Double inverted ZIRP bitches!

SMG's picture

Things may get so bad, like a loss of confidence in the currency, they may be FORCED to raise rates before 2014-2015.

Then everything will blow up for sure.

SilverTree's picture

WTF is up with FB after hours?

SeverinSlade's picture

Someone over at MS spilled some coffee on their keyboard.

SilverTree's picture

The market is a fuckin Zombie.


Michael's picture

People across the world get it. Great short video.

Fox: Ron Paul Supporters Interviewed in Poland


Harbanger's picture

I support RP but wtf does Poland have to do with American politics?  Don't look to other countries for direction kid, look yourself in the mirror and ask yourself what you can do.  Pipe dreams won't cut it, what have you done lately to help your brethren?  Small Govt means you have to step up and fill the void that's coming.

Panafrican Funktron Robot's picture

"a pickup in real disposable income growth."

I lost my shit on that one, lol.  

crkennedymd's picture

The wheels are off. We're riding on hubs and showering sparks

lemonobrien's picture

I ain't going back to jail.

SeverinSlade's picture

Anyone notice that the 50 day MA is very close to dropping below the 200 day MA?  Not that technical analysis means jack shit anymore in this age of HFT algos and central planning manipulating bullshit.  But the last time we had that dreaded death cross the markets became very the downside.

slaughterer's picture

Eat your peas, HFTs. 

Hype Alert's picture

And Reid & Boehner have worked out a plan to kick the can for another 6 months.


Fire them all!

Need More Cowbell's picture

QE is nothing more than a placebo going forward - same thing for anything anybody in Europe says

SeverinSlade's picture

Bingo.  Which is precisely why we've heard rumors of QE3 non-stop since QE2 ended.  Looking at any chart clearly shows that the law of diminishing returns is in effect here.  Each round of easing requires more and more fiat with less and less results.  QE3, whenever it finally comes, will be met with with initial excitement followed by a fairly quick and aggressive selloff.  Probably why Bernanke continues to wait.  What is the Chairsatan to do when he finally does announce more LSAP, only to see the markets drop 5-10% over the course of a few months?  Launch QE4 right away?

The Fed has one more bullet left in its magazine.  It's not a bazooka though, but merely a .22.  And the Chairsatan is staring down an 800 pound grizzly bear with gigantic gold nuts.

Need More Cowbell's picture

Right, and it will be nice when bad news = bad news because until BB drops his bomb doggie doo, bad news = good news = random number generator on SPY

LawsofPhysics's picture

ZIRP and NIRP are fucking QE!!  Free money for the banks and their government puppets.  Now if only you and I could get paid to take out a loan.

SeverinSlade's picture

But all those newsletters said that all we had to do was pray and trust in Bernanke. 

No QE with the S&P near 1400?  Unpossible.

lolmao500's picture

their central expectation is for a return to QE in December or early 2013.

And what happens to that when oil skyrockets because the Iran war has begun?? Commodity inflation through the roof... economy crashing... and Ben can't do QE3... shall be fun to watch.

Jake88's picture

If there is an Iran war your finances will be the least of your worries. That is if you weren't incinerated in the first intercontinental exchange.

Gringo Viejo's picture

After the child-king has been peaceably deposed.

FRBNYrCROOKS's picture

The attack on Iran will NEVER happen!!!! Iranians don't f-ing play!!!!! They fought Saddam for 8 years, lost millions and didn't blink. They need to get Blackwater out of Syria. They kicked them out of Iraq and see where they went? Trying to take over Syria. 

Captain Benny's picture

December 21st -- Welcome to the new [chaotic] world order.  bitches

FRBNYrCROOKS's picture

My wife realized, last night, we will be flying oversea on 12.21.2012 and made me think about the movie. I didn't even consider the date when making reservations. Sounds like a quick and easy way to go though!!!! I just hope we get out of San Francisco by the time the shit hits the fan since we are flying from the East Coast.

JustObserving's picture

"nothing more exciting than an extension of the current “late 2014” interest rate guidance to "mid-2015"

With US debt about $16 trillion and increasing at $4 billion a day, we can safely assume low rates will prevail for the next 20 years.  Don't need a Fed meeting to know that.


MrBoompi's picture

LIBOR illegal and very bad.....ZIRP legal and very good......

Got it dumbasses?

Cursive's picture


a decision not to ease is tantamount to a tightening. 

Methadone just ain't the same as heroine, huh?

vinu02's picture

if someone is new to stock market and will look at current level, one may think there was no depression or recession in US.

lolmao500's picture

And news out of ABC radio that another grid in India just went down... 800+ million without power... Bullish!

Hype Alert's picture

Second, a decision not to ease is tantamount to a tightening.


Does this mean the FED is now the market's bitch or is the market the FED's bitch?  Maybe their both on Meth and can't quit.

fonzannoon's picture

What do we do when these dividend paying stocks have all been chased up to the point where they yield 1% and all corporate bonds, even junk are chased up till they yield 1%? Then where do we put our money?

Beam Me Up Scotty's picture

Put it in your mattress or coffee can. Or buy gold.

Getting Old Sucks's picture

And then give the gold to the grandkids.  They're gonna really need it.

kito's picture

cash is king fonz. when the entire system collapses in on itself, nothing will be saved........and make sure you have plenty of canned, dry foods, toiletries, water filter, and means to defend it.........nothing you havent heard 1000x before on here. and dont keep it in a money market fund. the fed is already eyeing money market funds. they will limit how much you can withdraw when shtf.......worry about how the money will be returned to you, not how much return there is on the money.........................

LMAOLORI's picture



+1 on the Cash 


As for QE  September in an attempt to save obama

Bwahaha WAGFDSMB's picture

I'm not so sure more QE would actually be the best course of action for the Fed even if it were true that they cared about the outcome of the election.  Giving more money to the banks is not going to make angry populist Obama supporters very happy.

fonzannoon's picture

You know what I find funny tell somebody cash is king and they give you that winning smile. Then you elaborate a bit and say what you said about keeping real cash outside the banking system and they immediately give you the hairy eyeball.

busted by the bailout's picture

Market closes on LOD.  I smell disappointment in August and QE3 in Sept.

Disenchanted's picture




Yes but thank the Squid God the Dow is still levitating above 13 Thou...


Those 13,000 rally hats have been the head gear that have held their value the best.



Hedgetard55's picture

BenMario got the juice to 13,000 he wanted, no need for new QE, DOW may fall to 12k but that is where it was a few weeks ago, no biggie. Good job BenMario!

francis_sawyer's picture

 Q: Why not do more QE now?

A: We see three reasons.


First ~ We had it totally wrong & saw none of this coming a few months ago... Thus, we're net long at the moment because we were sure QE would have come already and need to dump some positions... When we get the midnight phone call that QE is, instead, imminent, we'll flip to net short & put BUY recommendations on everything...

Second ~ Our bonuses will be be better if we can bullshit our way through Q3 & come charging in in the final hour...

Third ~ Every day the fiat ponzi continues, means another day we can live in the Hamptons without ever having worries about things like dishpan hands...

Self Trader's picture

How funny :

1° Economy (markets) in bad shape = more QE likely.

2° Markets anticipate more QE = rally = things look better = no QE needed anymore.


Turin Turambar's picture

I don't trust GS.  While I don't expect QE3 until September (like everybody else), I wouldn't be surprised if it was announced tomorrow just to kick the shorts in the nads again and give the MMs a short-term bump to help unload some positions.

I hope I'm wrong.  Market will fly tomorrow with a QE3 announcement, and since I'm short, I'll get hammered.  :-(

JR's picture

Turin, I don’t trust GS, either, which means that the American people are in great trouble. Why? Because the operating arm of the Fed is the Federal Reserve Bank of New York, i.e. Goldman Sachs. And that means that the U.S. monetary system is a money monopoly run by Goldman Sachs, with announcements by Goldman Sachs acting as market interpreter. God help us!

Bernanke is a committed Keynesian manipulator, whose GS modus operandi is to print more and more money, debasing the currency to thus destroy capitalism, and, thus, freedom. God in Heaven, look at the money-property they’ve stolen from savers without one outcry from Congress and no way for savers to protect themselves. Not even a voice in our media-blocked free speech system.

Under Bernanke’s GS/Keynesian watch, the Fed “both encouraged other central banks to print more of their currencies and, especially after 2007, printed much more of its own (Hunter Lewis).” It’s ironic that it took a committed Communist, Keynes, to warn about the evils of inflation when he wrote:

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency….There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction…”

We're all, in one way or another, getting hammered. The good news, IMO, is that the financial crisis is on its way to blowing up. Depression is probably going to hit before Election Day. Investors should stand way back. The market’s coming, to take over....

It’s one thing for the Central Bank to steal money; but now its got the banksters in trouble, insolvency trouble.  You know – the Too Bigs to Fail.’

cougar_w's picture

I know, let's extend current low rates until 2085.

That's going to help a lot. But it's what they got.