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With global economic data deteriorating significantly, the calls for a new round of quantitative easing (QE) have increased. Morgan Stanley’s Vincent Reinhart, Goldman Sachs’ Jan Hatzius, and Bank of America’s Michelle Meyer all think Federal Reserve Chairman Ben Bernanke could announce a new round of QE or operation twist at the conclusion of the next Federal Open Market Committee (FOMC) meeting. That’s on Wednesday, June 20.But Deutsche Bank’s Joe LaVorgna thinks we might get a pretty strong hint of a new dovish monetary program as early as this Thursday.
From LaVorgna’s note to clients this afternoon:
Looking ahead, Chairman Bernanke’s testimony on the economy before the Joint Economic Committee on Thursday is no doubt the highlight of the week. Given Mr. Bernanke’s strong desire for policy transparency, investors believe the Chairman will effectively tell us whether the Fed is going to embark on an extension of “operation twist” or undertake QE3, when policymakers meet later this month.
LaVorgna acknowledges that the consensus is now calling for more easing. But he doubts if it’ll do any good.
Interest rates had been near all-time record lows even prior to the recent “flight to quality” trade into Treasuries; this is one reason why housing affordability has been hovering near all-time record highs for some time now. It is not clear that a further few basis points reduction in yields would meaningfully stimulate economic activity, especially if it only serves to reinforce investors’ concerns about economic and financial fragility.
Maybe we won’t get anything. At least that’s what UBS’s Maury Harris thinks.