Due to a considerable shift in expectations concerning the upcoming Fed monetary policy meeting, and pointing to an almost certain introduction of further stimulus, we have decided to publish a follow-up report containing a selection of more recent forecasts and updated analysts' commentaries.
The balance tipped in favor of QE3 in September after the disappointing NFP report, which was released last Friday and which revealed that the US economy added only 96.000 jobs in August, well below the consensus of a 125.000 increase.
Danske Bank economists emphasize that “the recent run of data has been largely consistent with weak and below-trend growth” and according to the ING team of analysts “the disappointing August payrolls report, showing growth of just 96,000, now means that the probability of additional substantive policy easing at this meeting is high,” because, as they remind, Ben Bernanke has recently expressed his “grave concern” with the situation of the US labor market.
Consequently, “it is very likely that the FOMC is going to announce a new asset purchase program on 13 September,” as the Rabobank Financial Markets Research team suggest, while Danske analysts also project a possible “extension of the forward rate guidance with a promise to keep rates unchanged until late or mid 2015 compared to the current guidance for late 2014.”
We believe that an extension of the forward rate guidance with a promise to keep rates unchanged until late or mid 2015 compared to the current guidance for late 2014 is baked in the cake. The minutes showed that there was already a majority in favour of such a change at the August meeting but that the Fed preferred to wait for the publication of updated economic projections in September.
In addition, we believe that the weakness in key economic data and in particular the labour market has tilted the balance at the Fed in favour of a new purchase programme (QE3). We expect the Fed to announce an open ended purchase programme in which the Fed at each meeting considers whether to extend or end its purchases."
But there are also other options, which is why we refer to substantive policy easing, not just QE. One of these is a cut in the interest on excess reserves held on the Fed’s current account (currently 0.25%). This could be cut to zero or even become negative (…) A Bank of England style Funding for Lending Scheme is another possibility. And whatever substantive measure is adopted, this will likely also be accompanied by a reworking of the forward guidance. This currently states no change in the Fed funds rate until at least late 2014. This is almost certain to be beefed up, and could either push back the timing to sometime in 2015, or add additional quantitative conditions, such as an unemployment rate target required for any easing of policy."
This time around market players are expecting the Fed to not only to increase its monetary stimulus through QE3, but also to extend its period of low interest rates. Others believe that the Fed's plans will also include lowering its RRR or using its discount window."
The balance tipped in favor of QE3 in September after the disappointing NFP report, which was released last Friday and which revealed that the US economy added only 96.000 jobs in August, well below the consensus of a 125.000 increase.
Danske Bank economists emphasize that “the recent run of data has been largely consistent with weak and below-trend growth” and according to the ING team of analysts “the disappointing August payrolls report, showing growth of just 96,000, now means that the probability of additional substantive policy easing at this meeting is high,” because, as they remind, Ben Bernanke has recently expressed his “grave concern” with the situation of the US labor market.
Consequently, “it is very likely that the FOMC is going to announce a new asset purchase program on 13 September,” as the Rabobank Financial Markets Research team suggest, while Danske analysts also project a possible “extension of the forward rate guidance with a promise to keep rates unchanged until late or mid 2015 compared to the current guidance for late 2014.”
Bill Hubard - Chief Economist at Markets.com:
"At the FOMC meeting on 12-13 September 12th-13th, the least that we expect is an extension of the interest rate pledge to well into 2015. We also expect the announcement of a new asset purchase programme, focused on agency MBS, probably unsterilized (QEIII). We expect the FOMC to extend interest rate guidance from late 2014 into ‘early’ 2015 and announce a programme of purchases amounting to $400-600bn mainly targeting mortgage-backed securities rather than US Treasuries. A soft US jobs report last Friday, which featured downward revisions to the previous months’ non-farm payroll employment, static nominal wage growth and a cyclical low in the labour participation rate, increases the probability of 'fresh' stimulus from the FOMC on Thursday."Ilian Yotov - FX Strategist and Founder at AllThingsForex:
"There is no question that the Fed Chairman is prepared to ease monetary policy further and the disappointing U.S. Non-Farm Payrolls data from last week could very well serve as the catalyst that triggers another round of quantitative easing. This is why it would not be surprising to witness a QE3 announcement or some other sort of monetary policy easing such as an extension of the timeframe for record low rates into 2015. The market is already pricing QE3 expectations and the USD has weakened across the board. Should the Fed stop short of deploying QE3 for the time being, the USD might be able take a breather as currency debasement worries get lifted off the greenback's shoulders."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. After the NFP publication (disappointing) though, this might change and a stimulus can be announced. 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. This time though, the market expects a clear declaration of QE3. Ben Bernanke is expected to announce QE3 this year and if this does not happen we will experience a sell off. There are some market theories stating that Bernanke is fueling Obama’s campaign and that strengthens the theory of a QE3 declaration. I still think the Fed could wait since the economic situation is not as bad as it seems. Sure, the NFP were worse than expected but other macro data remains rather stable. Nevertheless, if Bernanke does not meet market expectations, we will observe strong corrective movements. The introduction of QE3 is possible this, but rather after the elections. It would rather be an elastic QE, without predetermined, exact amounts of bonds buyback."Shahab Jalinoos – Analyst at UBS:
"Following the soft US employment data released on September 7, UBS economists expect the Fed to ease policy further by both extending its forward rate guidance into 2015 and by committing to asset purchases (focused primarily on US Treasuries) worth $500bio over 6 months (see 'UBS US Economic Perspectives: Too Weak For Too Long. 7 September 2012'). They expect to see language added to the Fed statement suggesting policy will stay highly accommodative even as the recovery progresses."Danske Bank:
"The recent run of data has been largely consistent with weak and below-trend growth and especially the continued weak labour market data are worrying the Fed. We thus think there is a good case for the Fed to launch a new round of easing.We believe that an extension of the forward rate guidance with a promise to keep rates unchanged until late or mid 2015 compared to the current guidance for late 2014 is baked in the cake. The minutes showed that there was already a majority in favour of such a change at the August meeting but that the Fed preferred to wait for the publication of updated economic projections in September.
In addition, we believe that the weakness in key economic data and in particular the labour market has tilted the balance at the Fed in favour of a new purchase programme (QE3). We expect the Fed to announce an open ended purchase programme in which the Fed at each meeting considers whether to extend or end its purchases."
ING Bank:
"Given Federal Reserve Chairman Ben Bernanke’s “grave concern” over the state of the labour market, the latest payrolls report has shifted the odds in favour of further stimulus. The fact that there are new Fed forecasts and the relative proximity to the Presidential elections support the case for action on Thursday. The disappointing August payrolls report, showing growth of just 96,000, now means that the probability of additional substantive policy easing at this meeting is high. What form this easing takes, is still up for debate, though the front runner is QE most probably open-ended as recently suggested by St Louis Fed President, James Bullard.But there are also other options, which is why we refer to substantive policy easing, not just QE. One of these is a cut in the interest on excess reserves held on the Fed’s current account (currently 0.25%). This could be cut to zero or even become negative (…) A Bank of England style Funding for Lending Scheme is another possibility. And whatever substantive measure is adopted, this will likely also be accompanied by a reworking of the forward guidance. This currently states no change in the Fed funds rate until at least late 2014. This is almost certain to be beefed up, and could either push back the timing to sometime in 2015, or add additional quantitative conditions, such as an unemployment rate target required for any easing of policy."
Financial Markets Research Rabobank International:
"Since last Friday’s Employment Report does not pass the test of 'substantial and sustainable strengthening of the recovery', we think it is very likely that the FOMC is going to announce a new asset purchase program on 13 September. What are they going to buy? The fact that the FOMC recently extended its current program of buying treasuries, Operation Twist, would make additional purchases of treasuries less likely than purchases of mortgage-backed securities. Also because of the Fed’s frustration with the slow recovery in the housing market, we expect a new asset purchase program to focus on mortgage-backed securities (agency MBS), more like QE1 than QE2. According to the minutes of the last meeting, the new purchase program should also be more flexible ('open ended') than previous programs to allow adjustments in respose to economic developments or to changes in the Committee’s assessment of the effectiveness of the program. That would argue against announcing a fixed amount during a fixed period. More likely,the FOMC will announce a fixed amount per month until certain criteria for unemployment and inflation are met."BabyPips.com FX-Men Team:
"Seeing as how Ben Bernanke has focused on the state of labor market and even said that high unemployment figures are a 'grave concern,' it's no surprise that many market players feel that the time is ripe for the Fed to finally light the QE3 match. And why not? ECB President Mario Draghi has certainly done his part in stepping up to ease investor concerns. Recall that just last week, Draghi boosted risk sentiment when he announced the ECB's Outright Monetary Transactions (OMT), a program that would enable the ECB to buy short-term bonds without limits as long as a financial troubled country formally asks for bailout help.This time around market players are expecting the Fed to not only to increase its monetary stimulus through QE3, but also to extend its period of low interest rates. Others believe that the Fed's plans will also include lowering its RRR or using its discount window."
