On Wednesday afternoon (Aug 22nd, 2012’) the Federal Open Market Committee (FOMC) released the minutes following their Aug 1st meeting, which sent the USD sharply lower in expectation of the possibility of the highly anticipated 3rd-round Quantitative Easing. Quantitative Easing involves the printing of new capital (currency) in order to fund the purchase of long-term US Treasury securities, with the hopes of keeping long-term interest rates as low as possible, and ideally will encourage the consumer to re-enter the economy to purchase ‘big ticket’ items such as automobiles, real estate, and other interest rate sensitive goods and services.
As Quantitative Easing is considered a very aggressive form of economic stimulus we may also anticipate certain market behavior as a result; namely strong stock prices and a weak USD. Specifically Quantitative Easing involves the injection of new dollars that previously did not exist into the economy, which increases the supply or buying power of the consumer to purchase a greater amount of goods and services, which in turn can directly translate into better corporate earnings, and higher stock prices. Furthermore the greater quantity of dollars in circulation simply dilutes the buying power of each USD and in turn weakens the currency against its common trading partners.
Specifically Federal Reserve officials stated further stimulus such as Quantitative Easing III might be introduced (and justified) during their next regularly scheduled meeting on Sept 12th-13th, IF economic conditions between now and then do warrant such aggressive actions. For that reason it is crucial that we watch the proceeding economic numbers scheduled to be released before the Fed’s next meeting in Sept. Specifically if the brunt of these figures point to a weak US economy that has so far failed to mark progress, traders may take this as a cue to expect a 3rd-round of Quantitative Easing. On the other hand if these economic figures reflect improving conditions, we may logically expect a lesser form of stimulus, or perhaps none at all. The Economic Calendar in the US approaching the Fed’s next meeting is as follows:
Aug 23rd – New Home Sales: 372k vs. 359k previous estimate
Aug 24th – Durable Goods: 4.2% vs. 1.6%
Aug 29th – Gross Domestic Product: 1.7% vs. 1.5%
Aug 30th – Personal Consumption Expenditure: 1.3% vs. 1.5%
Aug 31st – Fed Symposium in Jackson Hole, WY
Sept 7th – Unemployment Rate / Non-Farm Payroll 8.1% vs. 8.3%
Sept 12th-13th – FOMC Announcement! - QE III?
September 7th – Today the US Unemployment Rate was reported to have declined to a current 8.1% from the previous month’s 8.3% level. Although on the surface this report appears to be a positive development this report also reflected the fact that only 96k jobs were created, falling short of the expectations of 125k as well as the previous month’s revised 141k figure. As we now look forward to the highly anticipated Fed meeting on Sept 12-13th, we may better estimate the chances the Fed will create another round of Quantitative Easing (Q.E. III). The chart below illustrates the progress of the 3-very significant economic barometers we have discussed recently, including Gross Domestic Product, Personal Consumption Expenditure, and today’s Unemployment Rate.
Stay tuned for our next update as the Federal Reserve meets on Sept 12-13th where many traders expect an announcement on any future stimulus measures including the possibility of Quantitative Easing 3!