Market participants watching the Federal Reserve for clues as to what the central bank’s next monetary policy announcement will be are scratching their heads right now.The line among Wall Street analysts for a while has been to expect QE3 or some other form of additional policy easing in September.
BofA economists Ethan Harris and Michelle Meyer issued a note to clients yesterday saying, “We believe it has become increasingly possible that the Fed waits [to announce QE3] until December for confirmation of the slowing economy and completion of operation twist.”
Goldman Sachs chief economist Jan Hatzius echoed that sentiment, writing in a note today that “while QE3 at the September 12-13 FOMC meeting remains possible, our best estimate is that it will take until late 2012/early 2013 before Fed officials return to balance sheet expansion.”
Citi currency strategist Andrew Cox thinks investors should pay attention to Minnesota Fed president Narayana Kocherlakota when he speaks tonight in North Dakota at 8 p.m. ET.
Kocherlakota could provide clues as to what may come next for the Fed:
Appearances from Minneapolis Fed president Narayana Kocherlakota on Wednesday and Thursday will likely be watched more closely than usual. We are in the middle of a dry spell for Fed speakers between the August 1 Fed meeting and Jackson Hole on August 31 and investors’ expectations for Fed action at the mid-September are evolving rapidly in the aftermath of stronger than expected labour market data at the beginning of the month and stronger than expected consumer spending data yesterday.
Kocherlakota is a hawkish leaning moderate and is not an FOMC voter until 2014. His views on the economic and policy outlook are thus not very relevant for any immediate shift in Fed policy. However, there is still scope for considerable surprise today.
Since we last heard from Kocherlakota in May, we have seen a significant shift from the moderate core of the Fed with both Pianalto and Lockhart signaling a greater degree of openness to further Fed accommodation. Further, in the last few days both Williams and Rosengren have argued that further Fed accommodation is warranted. Signs that Kocherlakota’s views are evolving in a similar manner would lead us to believe that the broader Fed view has evolved significantly and that USD weakness has further to run.