Deutsche Bank has a prediction for what they think the FOMC’s statement on quantitative easing 2 will look like tomorrow.
From Deutsche Bank (emphasis ours):
To help support the economic recovery in a context of price stability, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $125 billion of longer-term Treasury securities before the next regularly scheduled FOMC meeting on December 14. The Committee is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate. In considering possible further actions, the FOMC will take account of incoming information about the economic outlook and financial conditions. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.
So, Deutsche Bank’s big call is that the Fed will not commit to a longer term price point but will, instead, supply a more short term support strategy. This way the Fed can judge the success of the program in between each of the 8 FOMC meetings, according to Deutsche Bank.
The other way: Deutsche Bank think if the Fed is feeling particularly dovish, they may tweak the number to suggest a maximum purchase amount over a period of time (their example, $500 billlion over 6 months). But they seem pretty sure on that original call.
Something to think about…
Where is the potential for failure here? This periodic approach is going to create a level of uncertainty in markets ahead of each announcement. And it may inspire the Fed to follow the market’s demands, rather than lead, if it isn’t doing that already. The market is always going to demand more QE, as it fulfils their “puts” on equity and other high risk asset prices.
So the Fed is going to be tempted to always choose more QE, no matter how well the economy is doing.