Goldman Launches The SS QE3

Tyler Durden's picture

As Zero Hedge said back in January, when we predicted the transitory "bounce" or "temporary hard spot" in the economy, well ahead of everyone, the first thing that would need to happen for QE3 to be launched is for Goldman's Jan Hatzius to admit that his December 2010 call  for an American golden age was a disaster, and to recognize that the economy is now contracting at a rate that will put last year's Q2 and Q3 GDP drops to shame. As of two weeks ago, that has happened. The only thing that was missing from our checklist was for Hatzius replacement, who enjoys the occasional Hefeweizen at the Pound and Pence with his former co-worker Bill Dudley, to make it clear what Goldman's position vis-a-vis QE3 is. Well, as of a few minutes ago we can cross that box too after Hatzius' lieutenant Sven Jari Stehn just said that "A sharp increase in the Fed's assessment of recession risk would most likely trigger significant additional monetary easing even if inflation remains well above their target." What has inspired this change in hear? Simple: nothing less than the "realistic–possibility of a significant further deterioration in the economic outlook." Oh well, the recovery was fun while it lasted. Same for the strong dollar. Next up: Jackson Hole in one month, where Bernanke will announce what the Dudley-Hatzius tag team has been whispering in his ear for the past month.

From Goldman: What Do Taylor Rules Say About the Threshold for Monetary Easing? (Stehn)

Discussion about additional monetary easing has reemerged with weak growth in the first half of the year. Fed Chairman Bernanke, for example, said that persistent weakness in activity and renewed deflationary risks would “imply a need for additional policy support” during his Congressional testimony on July 13. More recently, Chicago Fed President Charles Evans said that he might support a third round of asset purchases. 


What do Taylor-type rules say about the need for additional monetary easing? Our baseline Taylor rule describes how Fed officials have historically set the funds rate using four-quarter-ahead forecasts of core PCE inflation and the unemployment gap (actual less “structural” unemployment). (For details see Jan Hatzius and Sven Jari Stehn "The Warranted Funds Rate: Is It Really Negative?" US Daily, March 10, 2010.) Under our forecasts this rule currently suggests that the "warranted" funds rate is still substantially negative at -3% (see Exhibit). (Under the Federal Open Market Committee's (FOMC) June forecasts--which are somewhat stale at this point--the warranted Funds rate is also negative but higher at -1.4%.) This prediction is close to that from a rule estimated by Glenn Rudebusch of the San Francisco Fed, an update of which suggests that the funds rate "should" currently be around -3.3% (see "The Fed's Exit Strategy for Monetary Policy," FRBSF Economic Letter, 2010-18).

The problem with these simple rules, of course, is that they do not take into account the Fed's unconventional policies. By lowering long-term yields, the Fed's asset purchases were designed to substitute for conventional monetary policy and thus imply that the appropriate funds rate should be higher than suggested by the simple Taylor rules discussed above. (Put another way, if we "give the Fed credit" for asset purchases, the funds rate itself does not need to be as low.) Similarly, the Fed's guidance that it would keep interest rates unchanged for an "extended period" was designed to ease financial conditions. Our analysis suggests that the Fed's asset purchases are equivalent to a cut in the funds rate of about 75 basis points (bp) per trillion (trn) dollars of purchases, while the "extended period" language is worth an additional 30bp. (For details see Jan Hatzius and Sven Jari Stehn,"QE2: How Much is Needed?" US Economics Analyst, October 22, 2010.) Adjusting our baseline Taylor rule for these estimates suggests that the appropriate funds rate is currently -1.1% and will turn positive in mid-2013 (see Exhibit). 


Fed Chairman Bernanke's statement during the Congressional testimony suggests that Fed officials see asset purchases as a more powerful substitute for conventional monetary policy than our estimates suggest. Specifically, he argues that the Fed's asset purchases are equivalent to a 67 to 200bp reduction in the funds rate per $1trn of purchases. These magnitudes are based on a number of studies that suggest that the second round of asset purchases lowered longer-term interest rates by approximately 10-30bp. Unfortunately, Bernanke does not explain how he translates the estimated long-term reduction in interest rates into funds-rate equivalent terms. We suspect that these estimates are based on a study by Glenn Rudebusch (see citation above), who argues that long-term interest rates are four times as powerful in affecting output as changes in short-term interest rates--exactly the same multiple that Bernanke uses. Adjusting our simple Taylor rule with the mid-point of Bernanke's range suggests there is no need for additional easing: the current monetary stance is appropriate and the funds rate should actually be raised soon (see Exhibit).


Under what circumstances would these rules call for significant additional monetary easing? One possibility is a much smaller estimate of the effectiveness of asset purchases than Chairman Bernanke's. Indeed, our own estimates imply that the impact of QE2 is only slightly more than half the midpoint of Bernanke’s range. Similarly, updated simulations of the Fed's macro model ("FRB/US") suggest that reductions in long-term interest rates have an effect on output that is 2½ times larger than equivalent declines of the federal funds rate after four quarters. These simulations suggest that the observed decline in long-term rates is equivalent to a 25-75bp reduction in the funds rate--also quite a bit lower than the magnitudes cited by Bernanke. But even with these estimates, the Taylor rule would not point to the need for significant further easing.


The second–and probably more realistic–possibility is a significant further deterioration in the economic outlook. We estimated a few weeks ago that it would take a 1¼-point increase in the expected unemployment rate or a 1-point drop in the inflation forecast for additional easing to become appropriate. (See Sven Jari Stehn, "Sizing the Fed’s “Zone of Inaction",” US Economics Analyst, June 17, 2011.) Moreover, it is possible that these rules overstate the hurdle against additional easing. After all, Fed officials are well aware that the US business cycle is highly asymmetric. In the postwar data, every increase in the unemployment rate by at least one-third of one percentage point (on a 3-month moving average basis) has indicated a recession. Therefore, the Fed would likely respond asymmetrically to improving and deteriorating information at this point. A sharp increase in the Fed's assessment of recession risk would most likely trigger significant additional monetary easing even if inflation remains well above their target.

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equity_momo's picture

1700 by Jackson Hole.

1800 whilst Benny opens his mouth at Jackson Hole.

flacon's picture

Shalom swallows his Jackson HOLE WHOLE.

TruthInSunshine's picture

The Bernank says to his side kick, The William Dudley, to the Fedmobile, Dudster!

Off to The Jackson Hole.

Inflation, Schminflation! We need to ease monetary policy some more, bitchez!

Bear's picture

Black Helocopters over the Tetons

Terra-Firma's picture

inflate or deflate, the end result is unchanged: less buying and selling. Deflation goes to the saver inflation to the spender. that is, the rich get poorer or the poor get out of the debt hole. the real debate is about who pays the piper.

bigelkhorn's picture

the guys from have been getting laughed at for saying qe3 is coming.

But they seem to be two steps ahead all the time.

They know how the governemnt plays....act like it is backed into a corner and take actions that go against the people. The fasard continues people. What a joke!

I bet they cant wait to unleash QE4, oh and dont think it CANT happen either! QE 1, QE2, QE3, QE? yes yes. are you starting to wake up and see a pattern now! :P

Setarcos's picture

Coz I iz not in the disunited states I can only comment from the side-lines, which include knowing that Cantor (and no doubt others) has shorted the bond market.

He will make a fortune out of everything crashing and so will many others in their insane world of "money/financialism" is everything.  But it is all short-term innit!

In the long-run no one wins.

Meanwhile all those like Cantor - in the context of gambling about the "debt ceiling" - operate out of pure self-interest, so do not expect any meaningful resolution of "the debt crisis".

DaddyO's picture


Isn't it amazing how ZH provides a forum for the absolute bashing of the TBTF banks, the FED and every other party we love to bash, yet we hang on every word that these bastards utter.


Tyler Durden's picture

Yes, because not only do they make the rules, but they telegraph them too.

gordengeko's picture

That's right, just wait until QE3 is announced.  They will not be able to keep the lid on silver this time...and they know it.

knukles's picture

And without their promulgations, we'd nothing to bash.
Was it the chicken or the egg first?
Or the rooster?

TwoShortPlanks's picture

When a Central Bank acts as Market Maker/Manipulator it's all over as far as I'm concerned. Hanging by ropes from trees may telegraph to future generations that they acted too late, too little and incorrectly when they did.
Long on rope!

AldousHuxley's picture

they don't even have to telegrah. It is a given.

Fed can play this game longer than any trader shorting against it.

Just enjoy the gains.


oldman's picture

Rules, Tyler---what stinking rules???

"I win and you lose----always" ? That 's no stinking rule----it's fascism ----just plain and fucking simple fascism. Why try and put a pretty face on it?

I don't like authority           om

fishface's picture


the rule is not that you gonna lose...that is the result

The rule is how you gonna lose


I don't have authority


dogbreath's picture



I have been gone for the past few hours and upon returning here it shows that threads I haven't even visited are not equal in the number of new comments vs the number of total comments.  Is this a bug in the system or is there another dogbreath, imposter of course.

BTW, I'd like my junk button back.  Zero Hedge isn't womens international figureskating.


I am a Man I am Forty's picture

well, the market better go down a helluva lot more from here in order for them to get away with it

KennyG09's picture

"It is said that if you know your enemies and know yourself, you will not be imperiled in a hundred battles; if you do not know your enemies but do know yourself, you will win one and lose one; if you do not know your enemies nor yourself, you will be imperiled in every single battle."

-Some Chinese General Guy 

the mad hatter's picture

sounds like something confusious would say

macholatte's picture

Sun Tzu - The Art of War


It is essential to seek out enemy agents who have come to conduct espionage against you and to bribe them to serve you. Give them instructions and care for them. Thus doubled agents are recruited and used.
Sun Tzu

All war is based on deception.
Sun Tzu

BorisTheBlade's picture

Same Chinese general:

Keep your friends close, and your enemies closer.
fishface's picture

Sun Tzu ...again

If you know the enemy and know yourself, you need not fear the result of a hundred battles. 

If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. 

If you know neither the enemy nor yourself, you will succumb in every battle.


SilverRhino's picture

Pay attention to your enemies or they will skullfuck you when you arent watching.

Scottj88's picture

The Federal Reserve is a Private Bank, just like the TBTF banks.  The system that it has created is a giant illusion.  This is not a US Specific problem, as the European countries are trapped within the same nonsense system America is apart of.  Zerohedge does a great job teaching many of the specifics of the corruption.

LongBalls's picture

We are utterly screwed are we not? I have believed since QE2 started that this fiat game is coming to an end. I guess I should come off the rest of my dollars and buy more gold and silver. This crap would be funny if it were not so serious. Millions of people are about to get the high hard one!

High Plains Drifter's picture

i was listening to a alternative media radio show on the internet and these two guys were talking about things. they are probably in their thirties. the host said that according to his demographics research most of his listeners are in their thirties and forties and he wanted younger listeners but he said the reason why they don't listen is because they think they are growing up in the same world as their parents.  they  are correct. the young people of today haven't got a clue and i am afraid for them. their world is not their father's world. hard core reality coming hard at them, will not be pretty and will not be pleasant, as it won't for the rest of us as well.

Samual Adams's picture

Was it Patriot Radio news hour.   and the Dudes laugh a lot and joke and talk about gold.


I like them and download their show.  It's a lighter side to serious stuff.

Vic Vinegar's picture

Well doomers, some of you are going to be shit out of luck.  Some of us are going to be fine no matter what happens.

poor fella's picture

Did I not get some sarc? If you listen to Katy Perry then I can assure you, you are not fine... Are you 9? At least try Embryonic Journey or something that resembles music instead of a proactive commercial.

Vic Vinegar's picture

I like you dude.  I am 9 in spirit.

Tyler - quit trying to manage the unmanageable.


Central Bankster's picture

You have a good taste in music chumpppp.

slewie the pi-rat's picture

+ 75,000,000 + views + kt_pry +

HungrySeagull's picture

No Sir, we are not screwed.

Buy a coin bullion at a price lower than the ask. Make sure your spread is more than your purchase fee.

Wait until the buy is completed. Then transfer the coin to the ask column to sell at a profit. Again make sure your fee is less than the spread.


That way you should be successful in Physical Metals and Bullion. But take care, some metals are trading at spot or below price plus spot with very small gaps between Bid and Ask and the fees will eat your profits up.

That is how you fight a QE3.


This is the only time I will say anything about this.

j0nx's picture

Uh huh yeah right. Good luck buying silver for less than $4.00 over spot anywhere. Unless you buy in 1000 quantity which very few of us here can do. I buy 10-25 at a time myself and have found NOWHERE that sells for less than $4.00 over spot, at least in the past 6 months. Your advice is equal in value to the tits on a borehog.

darkstar7646's picture

You'll get it confiscated, especially in a full violent reset, which is the only real result of going "balanced budget" for any real length of time!

High Plains Drifter's picture

oh goody, up and down arrows............say something robo.........:)

monopoly's picture

Nothing surprises me any more.

"Pound and Pence", that is good sir, that is good. :)

Good night all. Gotta get some sleep for tomorrow's games.

baby_BLYTHE's picture

Someone has got to pay the price.

Will it be YOUR generation, will it be MY generation or will it be a FUTURE generation?

I suggest total collapse will come within the next five years.

Extend and pretend can only last for so long before it blows up in their face. Man, willl Ben and the FED ever be sorry for ever thinking the could get away with it.

The crime of the century 

SilverIsKing's picture

Not a chance this can be extended for five more years. The cat is jumping out of the bag on a daily basis with a greater and greater number of people waking up to the ponzi. As this snowball heads downhill, it will grow and roll faster and faster making it impossible to stop.

We're done here. Please turn out the lights before you leave.

j0nx's picture

Funny, the people I see on a daily basis are still only concerned about gay marriage, football, beer and reality TV. Not sure what people you're talking about. I think many of us here make the mistake of thinking that everyone else thinks like we do here on these kinds of blogs. The VAST majority of Americans don't even know anything is out of the ordinary. Trust me on this. Either that or they are still blaming those evil warmongering Repuglicans even though most of this shit happened while the D's had control of CONgress. The ones that do know are mostly still blaming the wrong culprits. Those of us here and on other forums that know the REAL score are probably less than 1/10 of 1% of the population. No, Americans are certainly not waking up to the ponzi.

darkstar7646's picture

Five years? Right now, I would not give total collapse five WEEKS. After tonight, I am only about 50-50 that this theatre ends before August 2.

darkstar7646's picture

And that's a MAYBE. (Not disputing, just emphasizing.)

I'm now in the "no deal" camp. I think we have run out of time, and I think it's going to take emergency actions not to "soft default"/prioritize. The "hard default" comes if they make certain decisions on prioritization, which I have already noted.

Yen Cross's picture

Blythe/ eur-usd on the top of the trade? Or play the FIBI? You are a child... Should we trade eur/jpy short or long?


     Buy the dip? [ wink wink] ?    You are a child with a female  toss across...  Nothing more and nothing less....


         Stay under the porch):  YEN

AldousHuxley's picture

"We all fucked"


boomers can't retire or retire in fear.

boomerangs can't get a job or buy a house

future kids are being screwed before they are even born as boomerangs with no job and no home will have less and less kids.