In a market which was left for dead with virtually no hope of a CTRL-Peus Ex Machina, and which otherwise would have tumbled to close at the lows, we realized that something was missing. In fact we noted it less than an hour ago:
Need a Hilsenrath rooomer
— zerohedge (@zerohedge) July 6, 2012
Sure enough, moments ago, with minutes left in the trading day and week, here comes the Fed's favorite leaking scribe, advising the market that not all is lost, and that Pavlovian dogs can, and in fact should continue to salivate at ever poster of a half naked toner cartrdige.
- Our Jon Hilsenrath: Weak Jobs Data Increase Likelihood Of #Fed Action, But Don't Ensure - WSJ
- Our Jon Hilsenrath: #Fed Hawks Want To Reserve Action For More Serious Threats - WSJ
- Our Jon Hilsenrath: Some Officials Interested In #Fed Mortgage Bond Purchases - WSJ
In other words Bill Gross was right again, and the next thing the Fed will buy will be MBS. However, will it do anything to fix the economy, create jobs, or fix inflation: of course not. But at least it should push the S&P that little big higher.
Here, specifically, is what the Fed told the WSJ to write:
Friday's disappointing jobs report increases the likelihood that the Federal Reserve will launch a new bond-buying program to boost economic growth, though it doesn't ensure such a move.
Fed officials emerged from their policy meeting in late June frustrated by the slow pace of the recovery and worried that the economic outlook was deteriorating. Economic data released since then have done little to allay those concerns, according to public comments by some officials and interviews with them before Friday's employment report.
Yields on 10-year Treasury notes fell to 1.54% on Friday, near the lowest levels in generations, reflecting market gloom about the economy and also possibly the anticipation of more action by the Fed. Bond-buying programs are meant to drive down long-term interest rates to spur spending and investment and to drive investors into riskier assets that might support economic growth, such as stocks.
The central bank's more activist camp believes more action is already justified because the economy isn't making progress toward reducing unemployment and inflation is low. Its hawkish wing, which worries more about inflation and which has been skeptical of the central bank's responses to financial crisis and recession, accepts that more action might be needed but wants to hold it in reserve for serious threats like recession or deflation.
"If we get some kind of major global disturbance or some kind of problem here in the U.S. and the growth outlook deteriorates sharply, then I think more action could be warranted," James Bullard, a Fed hawk, said in an interview last month.
The activists have tended to win out in many of these debates during Mr. Bernanke's tenure as chairman, though the hawks have helped to restrain the aggressiveness of Fed actions.
Some Fed officials in the middle don't have as high a bar to action as the hawks but are waiting to see if the outlook deteriorates anymore. "I am more leaning toward the view further action would be a response to deteriorating conditions and a deteriorating outlook," Atlanta Fed president Dennis Lockhart said in an interview with Dow Jones Newswires last month.
Officials could decide to wait through the summer to watch the economic data and revise their forecasts before making their next big decision. Many Fed officials want to be deliberate because economic data are hard to read right now. Still, the recent spate of disappointing figures—including feeble job gains and falling factory output, retail spending and consumer confidence--raises the likelihood that a bond-buying program will be discussed when they meet in July.
Bond buying, also known as quantitative easing, would be a controversial move inside and outside the Fed. When the Fed launched a $600 billion program of long-term Treasury bond purchases in 2010, critics assailed it for risking higher inflation and trying to push down the value of the dollar.
Since then, Fed officials have become less concerned that their policies are doing the damage critics warn about. But some have doubts that the policies are doing much good at a time when banks are reluctant to lend and consumers and businesses are wary of borrowing. However, Mr. Bernanke has made clear he believes Fed policies can boost growth.
"Monetary policy still does have some capacity to strengthen the economy by easing financial conditions," he said at his news conference.