According to him, the Fed may not announce a huge new round of QE at the November meeting, but rather a smaller, more open-ended program.
Mike O’Rourke of BTIG read this as the Fed trying to tamp down expectations, and regain some element of surprise in a market where big expectations are already baked in.
In communications with the public, it is always important to remain “on point.” Today the Fed decided it should reiterate and buttress its view on how a second round of Quantitative Easing (QE2) will look if it happens. Late this afternoon, the FOMC’s position was reiterated in the Wall Street Journal. “The Fed hasn’t yet decided to step up its bond purchases, let alone agree on an approach. After its last meeting, the Fed’s policy committee said it was “prepared” to take new steps if needed. A call on whether to buy more bonds depends on incoming data about economic growth and inflation; if the economy picks up steam, officials might decide no action is needed.” Interestingly, the Journal reported exactly what FOMC policy would be prior to each of the last two meetings. As a result, prior to this month’s FOMC meeting, we noted that “Since the Journal had the right policy action coming out of the last meeting, we suspect they will be right again. Therefore, we will watch for indications that the FOMC will allude to small scale asset purchases. We think it goes a step further than what we were advocating prior to the August meeting, re-opening the asset purchase program but only using it if necessary.” The WSJ article today reinforced this view.
Today’s story in the WSJ was very likely the Fed’s response to a CNBC poll in which 70% of the 67 respondents stated they believe Quantitative Easing will recommence. On average, the respondents expected the Fed’s Asset portfolio to grow by $500 Billion. Evidently, the Fed is rightfully concerned about permitting market expectations to get too far ahead of themselves. This centres primarily upon the consensus views of economists and strategists. Those more bullishly inclined like ourselves view less need for QE at this point, while those who are more bearish see a greater need for QE. Just last week, we noted that “There are many smart people on Wall Street who are expecting a large scale QE2 program to start in November. We are not among them. It also seems that the Street expectation’s is that if it happens, it will be big.” In that same note, we expressed our view that “As we see the situation, unless weakness in the economic data (or potentially the stock market) materialises, we expect the Fed to do nothing. We noted last night that we see the Fed’s move as an insurance policy and one that will only be cashed in only if necessary.”