The Fed has had stocks and gold spiking up since early September, and the dollar plunging, first on hints that it might consider providing another round of ‘quantitative easing’ if the economic recovery continued to worsen, and then practically promising it’s ready to do so.
It was a complete turnaround from earlier in the year, when it was saying the recovery was coming along nicely and it was time to begin removing some of last year’s stimulus programs, to prevent the economy from overheating and causing inflation.
As late as June its statement after its FOMC meeting said, “The recovery is proceeding and the labour market is improving gradually. Household spending is increasing.”
Even in its statement after its August meeting, while it worried that, “The pace of the recovery in output and employment has slowed in recent months,” it didn’t seem too worried, saying, “Nonetheless the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.”
Meanwhile, in all of its FOMC statements this year it had included the assurance that, “The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.”
When the stock market plunged in its worst August in years, and economic reports worsened further, analysts began asking what ‘policy tools’ the Fed was referring to, since it had already lowered interest rates to near zero, and when the new tools might be employed.
The response was that if necessary the Fed could engage in another round of ‘quantitative easing’ similar to the program it initiated to help pull the economy out of the 2007-2009 recession.
And as markets responded positively to that news, and economic reports continued to worsen, the Fed increasingly hinted it could be ready to pursue such a policy change soon.
However, it seems the Fed no sooner assured markets in recent weeks that it will engage in another round of quantitative easing (QE2) at its November 3rd meeting, than economic reports began improving. Retail sales surprised on the upside, manufacturing has shown signs of picking up, unemployment claims have declined, leading economic indicators were up 0.3% in September for the third straight month, and 3rd quarter earnings reports are including a number of improved outlooks from major corporations. Monday morning it was that existing home sales rose 10% in September, much better than forecasts of a 4% increase.
So, it may be that the Fed was correct during the summer in expecting the economy to slow but not into recession, and then begin to strengthen again.
In which case the Fed may now be wishing it had never mentioned quantitative easing, and particularly that it has almost guaranteed markets that it will provide it.
There were some hints last week that the Fed is at least backing away from the size of any quantitative easing program, which some had previously estimated might amount to more than $1.5 trillion – and perhaps even backing away from the timing of it.
For instance, perhaps preparing markets for disappointment, St Louis Fed President Bullard said last Thursday that, “No decisions have been made . . . . . If we do decide to go ahead with quantitative easing we could think in monthly increments of about $100 billion . . . and then I think we could give forward guidance at each successive FOMC meeting that would suggest how likely the committee thinks it is that it will continue these purchases.”
Last week markets that had factored in substantial QE2 easing seemed to wonder if they might be disappointed. Gold tumbled more than $40 an ounce. For the first time since the bottom fell out for the dollar again in early September, it closed up for the week. And even the hot stock market rally ran into unusual up and down volatility, seemingly uncertain about what to expect.
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