Why The Fed Won't Do QE This Week

The Federal Reserve is to decide on Thursday whether it’s going to launch another round of Quantitative Easing this Thursday.

We just put up a survey on the subject, but so far, the No QE camp is winning overwhelmingly.


You can still vote here.

The plurality think that the Fed will only extend guidance, but not do bond purchases, leaving that bullet on the table for a latter meeting.

Opinions among analysts and pundits are split. Goldman thinks there’s a greater than 50/50 shot. Nomura thinks there won’t be QEIII. Calculated Risk writes a good case for QEIII here.

Our guess: The crowd is right, and that we’ll only get a change in language, but no QEIII.

Here’s why:

  • The economy still appears to be getting better. Citi’s Economic Surprise Index has gone positive, and continues to rise.
  • Unemployment fell to 8.1%. You might say this is meaningless, since it was a result of people leaving the workforce, but that doesn’t change the fact that if the workforce is shrinking that rapidly, then the labour pool is marginally closer to full employment, thus creating inflation risk. The Fed might also wonder (as others have) whether the weak NFP number was the result of a bad seasonal adjustment, rather than an underlying reflection of the economy (other labour market indices were quite solid during the month).
  • Meanwhile, the ECB just did the #1 thing that was needed for the global economy by taking the tail risk off the table with its bond buying program. That’s FAR more important and impactful than anything the Fed could do right now.
  • In the post Michael Woodford-era (Woodford being the economist who advocated NGDP targeting at the recent Jackson Hole conference), the Fed might feel as though a language change is the more robust move it can make.
  • The bar is probably high due to the electoral scrutiny. Easing in December will be much more palatable, and the Fed will also have more clarity as to how the Fiscal Cliff will be resolved.
  • Asset prices are at multi-year highs, and again, with the help of the ECB, financial conditions are quite easy.

Anyway, this is just our conjecture. It’s probably going to be a close call, but the factors above tip the odds of a balance sheet expansion to a point in the future.

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