UPDATE: Weak NFP results increase chances of QE3 from the Fed

During his speech at the Economic Summit in Jackson Hole Fed Chairman Ben Bernanke signalized the central bank's willingness to introduce more stimulus, should the economic situation in the US deteriorate further. Nevertheless, the majority of market experts polled for the special forecast report believe that unless we see a considerable drop in the NFP numbers, the FOMC should remain on hold in September.

Fed

In Bill Hubard's opinion, in the nearest future the Fed's stance will be of "watchful waiting rather than one of more aggressive actions called for by many." Even though Ben Bernanke has been declaring Fed's willingness to deploy stimulus measures for several months now, at the same time US economic data has been showing signs of improvement "which might be enough to steer the Fed away from resorting to another round of quantitative easing at the September meeting or even until after the US Presidential election," speculates Ilian Yotov.

The FOMC might also want to wait for the German constitutional court's ESM ruling, which will take place on September 12, as "an approval from the court could ease the pressure on the Fed to ease," as Yohay Elam points out. Therefore, the general expectation for the September meeting is for "Bernanke to leave doors open for further facilities, maintaining QE3 speculations alive," in the words of Valeria Bednarik.

The Fed will announce its monetary policy decision on September 13 at 18:00GMT. Read below the complete commentaries of the contributing market experts.

Ilian Yotov - FX Strategist and Founder at AllThingsForex:

"There is no question that the Fed Chairman is prepared to ease monetary policy further. On the other hand, the U.S. economic data in recent months, although far from spectacular, has at least shown signs of improvement which might be enough to steer the Fed away from resorting to another round of quantitative easing at the September meeting or even until after the U.S. Presidential election. This is why it would not be surprising to see an announcement of some sort of monetary policy easing (such as an extension of the timeframe for record low rates into 2015), but the Fed would probably stop short of deploying QE3 for the time being. Of course, this doesn't mean that more quantitative easing is completely out of the picture, but at least for a while the USD could take a breather as QE3 expectations get lifted off the greenback's shoulders."

Yohay Elam - Analyst at Forex Crunch:

"Following the justification of previous quantitative easing and using the word 'grave' to describe unemployment, many expect the Fed to announce QE3. However, this isn't a done deal. Some recent indicators have shown improvement in the US economy, especially July's Non-Farm Payrolls. August's numbers will be of importance. In addition, the ruling of Germany's constitutional court just before the FOMC meeting begins is also critical. An approval from the court could ease the pressure on the Fed to ease.
The Fed could opt for extending the guidance for low interest rates from late 2014 to mid or late 2015. This would be a compromise between hawks and doves. Unless the judges in Karlsruhe disappoint, extending the guidance has higher chances than outright QE3, which has 'diminishing returns' as Bernanke previously said."

Adam Narczewski - Financial Analyst at X-Trade Brokers, XTB:

"In Jackson Hole Bernanke has not said anything new that we have not heard before. The statement that the Fed is ready to act is a tape that we are hearing for months. I do not expect any actions from the Fed on their next meeting. Operation twist is in effect till the end of the year so this tool is out of question at this point of time. The question is if they will repeat what was said on the last FOMC meeting – if there will be no improvement in the economy, the Fed will act. If so, the market will take this statement as a confirmation of QE by the end of this year. On the other hand, if Ben and Company take into consideration the recent better macro data from the U.S, the market could come to the conclusion that QE3 will not take place. In the meantime, if macro data keeps showing improvement, QE3 will not be considered. Worse macro data would force the Fed to introduce QE3, but after the elections (at the earliest). It would rather be an elastic QE, without predetermined, exact amounts of bonds buyback."

Bill Hubard - Chief Economist at Markets.com:

"Given the alternatives available to Bernanke and the FOMC after today’s US ISM data, and ahead of Thursday’s ECB meeting and Friday’s US non-farm payrolls numbers, we view the most likely scenario for the near term to be one of watchful waiting rather than one of more aggressive actions called for by many. If the Fed is actually or nearly out of options, then responding to short-term market demands for more QE seems like a very risky strategy, with the only payoff being requests for more and more.
Recent US payrolls, IP and retail sales numbers have been OK, but the minutes to the August FOMC suggested the Fed remains unhappy with the pace of growth and mentioned that action could be taken 'fairly soon.' Leading indicators, such as confidence and the ISM, point to flat-lining activity, while the 'fiscal cliff' remains a significant threat. A dovish spin from Bernanke will reinforce market expectations of more stimulus, be it QEIII, possibly through MBS purchases, or possibly other efforts, perhaps similar to the Bank of England’s Funding for Lending Scheme. The case will be bolstered if next Friday’s payrolls report posts lacklustre gains."

Alexandra Estiot - Senior Economist at BNP Paribas:

"Ben Bernanke made it clear that the US labour market was in a situation far from satisfactory, with the unemployment rate two percentage points above its estimated natural level. While he ruled out the possibility that this elevated level was corresponding with a structural shift of the unemployment rate, he stressed the risk a prolonged period of high unemployment could have on the potential rate of growth of the economy. It is very clear that the Fed is ready to provide some more stimulus, with the September meeting being a perfect timing for announcement with the update of FOMC members’ economic forecasts and the press briefing. As for what exactly will be announced, the Jackson Hole speech provided us with some clues. First, Chairman Bernanke emphasised the potential effectiveness of not just quantitative easing but also of the forward guidance. We thus expect the forward guidance to be once more extended (to mid-2015) and more clearly linked to specific economic conditions, probably an appropriate level for the unemployment rate. Second, Chairman Bernanke reminded us several times of what the Fed can and cannot buy, ruling out the purchases of securities other than Treasuries, Agencies and Agency-backed securities. The stress put on the housing sector not contributing as much as usual to the recovery tends to announce large purchases of the latter class of assets. As for Treasuries, purchases are likely to be focused on the medium-term part of the curve. Indeed, even if Fed’s holdings of Treasuries remain limited enough not to hamper the functioning of the market, on the longer-part of the curve, we are moving dangerously closer to that level. The question that remains unanswered is the possibility of an open-end program. It would make a lot of sense for both doves and hawks to link QE to specific economic conditions…"

Alberto Muñoz - Forex Analyst at FXstreet.com:

"Although last Bernanke's speech at Jackson Hole has increased chances of a new Quantitative Easing program, as he defended the benefits of his monetary policy so the markets have interpreted this as green light for more easing. Anyway labor market data, which will be released next Friday, will be key to take a decision in the next FOMC meeting. A better than expected employment report, with a higher than expected Non Farm Payrolls figure probably will put the Fed on hold, but a worst than expected figures would sink the US Dollar and Gold would rally as it would confirm a new QE program extension. Therefore it's very likely that the market will anticipate Fed decision this Friday."

Valeria Bednarik - Chief Analyst with FXstreet.com:

"At this point, it seems unlikely that the Fed will act on the upcoming September meeting. While we still need to hear the August NFP reading, latest data points for an improvement in the employment sector. It is however, too slow to relax over the possibility of more easing, but enough to delay it after the US Presidential elections. I would expect Bernanke to leave doors open for further facilities, maintaining QE3 speculations alive, but no action to be taken this month."