Goldman Dissects The Fed's Statement, Expects QE2 Announcement On Midterm Election Day

Jan Hatzius was spot on in his menu selection for the Fed's a la carte menu. What comes next? "We continue to expect that a sizable asset purchase program will be implemented in coming months." Most likely date: November 3, smack in the middle of the midterm elections. Alas, it will thus be either a case of sell on the news, or outright selling into the event. The one asset likely to benefit the most from ongoing dollar devaluation, is likely the same as the one that benefitted the most today: precious metals and other commodities.

From Goldman Sachs

Fed Signals Willingness to Ease Further if Growth or Inflation Continue to Disappoint

BOTTOM LINE: FOMC signals willingness to ease further, most likely through asset purchases, in a statement that signals dissatisfaction with inflation trends but changes very little with respect to the growth assessment. We continue to believe that a sizable (cumulating to at least $1 trillion) increase in the Fed's balance sheet will begin in coming months, most likely via purchases of Treasury securities and with a decision to this effect a strong possibility at the November 2-3 meeting.


1. As we thought likely, the Federal Open Market Committee (FOMC) signaled its willingness to ease monetary policy further ("provide additional accommodation," in Fedspeak), if needed, to help support the economic recovery and to get inflation back to its desired level. While the committee did not specify that this accommodation would come via asset purchases, this was strongly implied by the omission of a paragraph that had said that the committee's objective was to keep the balance sheet at its current size ($2.3trn).

2. Otherwise, changes in the statement were notable mainly for their focus on inflation. Specifically, the inflation paragraph says more clearly than ever before that inflation is below the range the committee judges as acceptable. The committee then reinforced this by noting that one objective of the additional easing would be to push inflation up. This is important not only because the Fed has explicitly said inflation is too low but becuase pushing it back up would generally take longer than to push growth up.

3. Changes to the assessment of growth were strikingly small and actually mixed, though that was relative to a fairly subdued statement in early August. The Committee downgraded somewhat its take in business equipment spending, noting that was less strong than earlier in the year, but it also qualified its comment on the declining trend in bank loans by noting that this trend had also abated..

4. We continue to expect that a sizable asset purchase program will be implemented in coming months. This will most likely cumulate to at least $1trn, possibly quite a bit more, and will probably be focused in purchases of Treasury securities. Both the size and the timing will depend on data, but the next meeting of the FOMC-a two-day session on November 2-3-remains a strong possibility. This is when the FOMC next releases its once-a-quarter set of forecasts for growth, inflation, and unemployment. The explicit recognition of the weak trends in the economy and the extra day to discuss its options create both motive and opportunity to act, though it bears repeating that the timing of this decision will be data dependent.