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Markets were disappointed when the Fed failed to extend its promise of low interest rates to 2015 and didn’t offer signs of QE3. Instead it said it would “closely monitor incoming information” and that it would “provide accommodation as needed.”Bank of America’s Michael Hanson writes that Fed officials noted that economic growth had “decelerated somewhat” in the first half but didn’t change its expectations for “moderate growth” in coming quarters.
Hanson notes that second quarter GDP growth was weaker than what is implied by the Fed’s year-end forecast and he expects another cut to the Fed’s forecast which would build the case for another round of quantitative easing:
“Given that Q2 real GDP growth was much weaker than the Fed’s end-of-year forecast implies, we expect another downward revision to their forecasts, which should bolster the case for further easing. The Fed has highlighted their desire for a “sustained improvement in labour market conditions.” If the two payroll reports between this meeting and the next are sufficiently soft — payroll growth below 100,000; the unemployment rate steady or rising — then further easing would be more likely.
Signs that inflation is likely to remain below the Fed’s 2% target for a while, or that financial conditions are deteriorating, would also make further easing more likely.
Conversely, a general improvement in the tone of data releases would decrease those chances.”
Hanson thinks that Europe’s debt crisis and the fiscal cliff will continue to weigh on the economy and also build calls for more easing.
Bank of America still sees a “significant chance of the Fed launching QE3 at the September meeting”. And in that event it is likely to push interest rate hikes to late 2015 as well.
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