The Fed's Synthetic QE Program Has Been Working Great

CNN says that about half of investors think that the Fed will not do QE. I was listening to Bloomberg Radio yesterday and the pros interviewed seemed to be unanimous in asserting that the Fed would do “something” because it “had to.” There have even been many cases of pundits and seers who were quoted in the mainstream media quantifying the probability of Fed action, which is absurd. This isn’t dice or coin flips.

I know the FOMC as a group is delusional, but they are not stupid. With stocks at new highs, and with the Fed having seen the negative effects of the last round of QE in terms of energy, materials, and food prices, I have been of the opinion that the Fed will not do anything other than what it is already doing. It will probably continue the MBS purchases, and extend the tilted Twist by buying slightly more from the Primary Dealers than it is selling to them. That can only go on for so long however, as they are running out of short term paper to sell.

The Fed will continue to talk the talk, but not walk the walk. If the players are convinced that more QE is coming they will front run it and buy stocks, which is the Fed’s desired effect. There are plenty of excess reserves that the banks and can use as a base to extend the margin to fund these speculative buys. This is called “synthetic QE,” which is when the Fed gets the effects of QE by jawboning, without actually conducting operations.

At some point, it is possible that they will opt for an outright purchase program that is extremely limited in terms of size. I think that will have to wait until after the election.  But I think it’s more likely that that will not be necessary, thanks to the Fed’s jawboning and the synthetic QE effect.

If the Fed does nothing, in the short run the market may exhibit some disappointment. Then one of two things will happen. The economic data will continue to show some growth, and traders will return to gingerly buying stocks, or the numbers will weaken and the speculation on more QE will again result in front running purchases.

Here’s what CNN had to say about its poll.

This week’s Federal Reserve meeting is front and centre, with many still on the fence about whether or not the central bank will announce any new stimulus measures.

More specifically, investors have remained divided about a third round of bond buying, or quantitative easing, by the central bank.

A little more than half (52%) of the 13,000 respondents to a CNNMoney poll say they don’t think the Fed will announce so-called QE3 when it wraps up its two-day meeting Thursday afternoon.

That’s similar to what a lot of market strategists and economists have been saying. By and large, they think the Fed will probably announce some form of stimulus. But they pretty overwhelmingly don’t think the market actually needs it.

via Hedging QE3 bets, 52% say Fed won’t act after all – The Buzz – Investment and Stock Market News.

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