SocGen: Why The Fed Could Give Us QE3 As Soon As April

Employment data has been strong in recent months and GDP seems to be moving sideways.  Some believe these conditions aren’t bad enough to get the Fed might not be able to step up easing.

But Societe Generale analyst Aneta Markowska argues current price signals do not point to a level of unemployment that is low enough that would cause inflation to accelerate (i.e. the non-accelerating inflation rate of unemployment – NAIRU).

Remember, Bernanke said if inflation remains low and unemployment continues to be elevated there would be a case for additional policy action.

Markowska argues that hourly wage growth has been decelerating, inflation expectations are stable, and output gap (difference between potential GDP and actual GDP) is moving sideways. In this context she says QE3 is more likely than not and it’s coming sooner than later.

“…Even if we go with consensus numbers and assume a 2% growth rate, this would still suggest that the economy has lost some of the momentum seen in late 2011 and that the output gap is merely moving sideways.

This stands in sharp contrast to employment readings which point to a meaningful acceleration in the pace of hiring and a notable narrowing in the employment gap. 

To be sure, half of the recent decline in unemployment was due to a drop in labour force participation and household employment growth has been overshooting payroll employment and could reverse in the spring. However, payroll gains themselves have been outsized relative to GDP growth. As seen in the chart [below], total man hours (data through February) and monthly GDP (data through January) have diverged completely and are moving in the opposite direction.


Photo: Societe Generale

While this gap could be resolved through data revisions, Q1 data points to a slower growth rate. But Markowska says if we take the data at face value and expect no revisions then productivity growth definitely seems to be slowing greatly. However she does think the drop the in productivity growth is cyclical not structural.

In light of all of this Markowska expects the FOMC to wait for a bigger trigger before announcing more easing but thinks the odds of QE3 being announced mid-year are very likely. SocGen’s call is for an April announcement of QE3 that could however be pushed further to June.

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