Last week Fed Governor Tom Hoenig mentioned the fact that the Fed may consider QE3, and some apparently took that as a reason to get even more bullish.
According to John Hussman, the comments were taken completely out of context.
Here’s how he puts it:
On Monday, Wall Street let out a collective squeal of excitement as Thomas Hoenig, the president of the Kansas City Federal Reserve said that QE3 “may get discussed” if economic progress turns out to be disappointing as the year progresses. Part of the subtext that was lost in this enthusiasm is that Hoenig has consistently dissented on the policy of quantitative easing, and has called for the Fed to immediately raise interest rates to 1% and possibly higher. In saying that QE3 may get discussed, he wasn’t offering hope to Wall Street, but was instead criticising the existing policy of the Fed. The way to understand the comment is to put it in the context of Hoenig’s long-standing dissent and open criticism of quantitative easing. My guess is that his complete remark was something like “The current trajectory of Fed policy is dangerous. When will it stop? Who knows? Aside from fueling speculation and inflation risk, QE2 won’t help the real economy, but if the numbers are disappointing, even more reckless policies like QE3 may get discussed.” Last week, Hoenig warned of another boom-and-bust cycle, and repeated his call for the Fed to reverse course, saying “I hope I’m wrong. I hope they’re right. But I don’t think so.”
Near the end of the old TV series Happy Days, as the writers became desperate for material, there was an episode where Fonzie jumped his waterskis over a shark. That episode was widely viewed as the point where the show had simply gone on too long. My impression is that the sudden hope for QE3 is Wall Street’s version of jumping the shark.