Goldman: QE2 Launches In One Month... Or Else

Goldman is now convinced that the November 2-3 meeting will bring at least $500 mbillion in either "big bang" or staggered QE2. And stocks have pried it in. If this fails to materialize the market will crash, as the next meeting after that is not for almost another 3 motnhs, on January 25, by which point the economy will be firmly in re-recession (now that it is uncool to say Double Dip thanks to a few overcompetent Ph.D.'s), and any monetary stimulus will be too late, which would lead the Fed to overextend and do something really stupid... Like send gold to $50,000.

From Goldman's economic team:

Dudley Speech Suggests Asset Purchases in November Even More Likely

BOTTOM LINE: New York Fed President William Dudley’s speech this morning suggests strongly that the FOMC will announce $500bn in asset purchases at the November 2-3 meeting.  We had already thought some announcement of this sort was a "strong possibility" and now see it as even more likely, though it obviously still depends on data yet to be seen.  On a longer-term horizon, he also discusses ways in which the Fed could communicate more clearly its intent to get both inflation and unemployment back to levels consistent with its “maximum employment” and “price stability” mandates.


1. The speech starts with a clear statement that “the current situation is wholly unsatisfactory,” having described the current situation as a tepid recovery that has failed to bring unemployment down and has led to declines in inflation that the FOMC has already labeled as inconsistent with its mandate.  Therefore, “further action is likely to be warranted unless the economic outlook evolves in away that makes me more confident that we will see better outcomes for both employment and inflation before too long.”

2. In other words, in President Dudley’s view, the onus is on the economy to improve and to do so quickly; otherwise further easing measures from the Fed are warranted.  Although he includes the usual caveat that he speaks for himself, we see this as a signal that an announcement of renewed asset purchases is likely at the November 2-3 meeting, though obviously a sharp turn in the data could push this back.  Furthermore, a passage in the speech discussing the benefits of $500bn in purchases suggests that purchases of this magnitude are likely, but it is difficult to know over what time period they would take place and the extent to which the FOMC would indicate willingness to do more.

3. The speech goes on to explore issues of a longer-term and more fundamental nature, including: (a) a suggestion that the FOMC could consider what amounts to price level targeting, in which the committee would commit to offset low-side misses on inflation with high-side ones later on, (b) an assertion that further expansion of the balance sheet should not be considered monetization when the economy is operating so far below full capacity, (c) concerns about the Fed’s ability and willingness to exit balance-sheet expansion are misplaced given the development of tools to accomplish the exit, and (d) worries about the central bank’s selling assets at a loss should be subordinated to the ultimate objectives of getting the economy back to the Fed’s policy mandates, especially since earnings are high to begin with.