After Bernanke’s testimony on Thursday, expectations that the Fed would do QE3 at its June 20 dropped sharply. The thinking was that Ben was much more reticent than folks had expected.
But Morgan Stanley’s Vincent Reinhart — who previously set odds of QE3 at 80% — is undeterred.
In a note out today, Reinhart explains why all of the sceptics are wrong.
The investors we talked to pushed back in two directions.
First, why would the Fed rely once more on balance-sheet action, which must surely be subject to diminishing effectiveness? The answer is familiar to anyone who watched armed-service movies of the 1940s. At a critical point, an officer asks, “Is anyone willing to volunteer for a hazardous mission from which you will probably not return?” Everyone takes one step back, except our hapless hero.
Ben Bernanke is our hapless hero. The Fed is the only entity in a gridlocked Washington DC willing to work a lever of policy, even if the officials of that institution are not confident that the lever will move markets and the economy much.
As for the second pushback, some investors noted that our hero spoke on Thursday before the Joint Economic Committee and did not strongly signal action. Should you worry? No. That was also straight out of movies of the 1940s. Heroes then were laconic, even the tragicomic ones. They respected their colleagues’ free choice and did not want to presume their future action, even if it was inevitable.
Chairman Bernanke did put a marker down when he repeated the ritual reassurance that “the Committee reviews the size and composition of its securities holdings regularly and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.”