Will QE3 Happen?

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• Yahoo Finance – Time to Let Markets Adjust on Their Own, Stop Intervention: Jim Bianco
  “Quantitative easing is all about trying to prevent pain in the marketplace,” he says. ” But in doing so, it prevents adjustments, and that’s why markets like housing can’t move forward.” Given the latest housing statistics, few would argue that point. “The problem with housing is that we’re at the wrong price, so prices have to come down” Bianco says. “But we don’t want prices to come down, so we invent like 58 programs and QE to prevent them from coming down, and then we complain that prices aren’t going up. Going up?! They still need to come down.” But as much as Bianco would like to see the Fed’s money-printing experiment ended with QE2, he admits that the chance of QE3 goes up with each weak data point that comes out. And lately there have been many of them, including the private payroll flop from ADP and a big slump in ISM Manufacturing on Wednesday alone. “I cant imagine the Fed would do two trillion of quantitative easing…and saying ‘Look guys, we tried, you’re on your own,'” Bianco says. ” No, there will be QE3 and 4 and 5.” “At some point, if you believe in free markets and the capitalist system, you have to let markets adjust” or risk an outcome like Japan, which Bianco says has been “muddling along” for 22 years. “Never really a catastrophe, but never really gets better either.” In place of “slow and ugly,” Bianco would prefer a “very modified version” of what was done in 1974 and 1932 that “would be bad over the very short term but then it’s over and things start getting better…we hit bottom and can see things moving forward as opposed to this perpetual waiting and waiting and waiting like Japan.”

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• The Wall Street Journal – Jon Hilsenrath:  Fed Holds Steady as Economy Slows
  Federal Reserve officials are in no hurry to respond to recent indications U.S. economic growth has hit another soft patch, despite chatter in financial markets that the Fed might start a new program of U.S. Treasury-bond purchases to boost growth. The central bank has already purchased more than $2 trillion of mortgage and Treasury bonds. The purchases are meant to hold interest rates down by reducing the supply of securities in private hands and to drive investors into areas such as stocks to encourage businesses and consumers…In an April news conference, Mr. Bernanke said the tradeoffs that would come with additional purchases were becoming unappealing. “It’s not clear we can get substantial improvements in [employment] without some additional inflation risk,” he said. Fed officials have largely held to that line.
• The Financial Times – Back towards a US double-dip
  The US economy was supposed to be in bloom by late spring, but it is hardly growing at all. Expectations for second-quarter growth are not much better than the measly 1.8 per cent annualised rate of the first quarter…The recovery has stalled. It is unlikely that America will find itself back in recession but the possibility of a double dip cannot be dismissed. The problem is not on the supply side of the ledger. Corporate profits are still healthy. Big companies continue to sit on a cash hoard. Large and middle-sized companies can easily borrow more, at low rates. The problem is on the demand side. American consumers, who constitute 70 per cent of the total economy, cannot and will not buy enough to get it moving. They justifiably worry that they will not be able to pay their bills, or afford to send their children to college, or to retire. Banks, with equal justification, are reluctant to lend to them. But as long as consumers hold back, companies remain reluctant to hire new workers or raise the wages of current ones, feeding the vicious cycle.
• CNBC – Third Time’s a Charm? Whispers of QE3 Emerge
  Most Fed watchers still see a third round of quantitative easing, or QE3, as a very remote possibility. The obstacles this time around are greater, since inflation has been creeping higher and the jobless rate, while still at an elevated 9 percent, has come down quite a bit in recent months. “It’s highly unlikely, but never say never,” said Jim O’Sullivan, chief economist at MF Global. The Fed would also prefer to avoid reliving the domestic and international furor its second round of bond buys unleashed. Though Fed officials would rather not admit it, the criticism has weighed on their decision-making. When the central bank embarked on the $600 billion round of Treasury bond buys, Republican politicians, some economists, and even a couple of top Fed officials cautioned that the measure, aimed at keeping borrowing costs down and stimulating the economy, would not work and risked sparking inflation. Policymakers in emerging economies, for their part, argued the measures were a thinly veiled effort to weaken the dollar and boost U.S. exports at their expense. They bemoaned the rise in currency values and capital inflows that ensued.
• CNBC – El-Erian: Why Fed Is Unlikely to Have Third Round of Easing
  I suspect that it is very unlikely that there will be a QE3. This view is based on an assessment of economic, political and international factors. As Chairman Bernanke noted in his August Jackson Hole speech, and reiterated in his first press conference a few weeks ago, policy measures should be judged in terms of the expected balance of benefits, costs and risks. I suspect that there is now broad agreement that, in the case of QE3, this balance has shifted: lowering the potential gains and increasing the probability of collateral damage and adverse unintended consequences. It is also clear that, in its attempt to deliver “good” asset price inflation (e.g., higher equity prices), the Fed also got “bad” inflation. The latter, which essentially took the form of higher commodity prices, is stagflationary in that it imposes an inflationary tax on both production and consumption—thus countering the objective of QE2. Politics also plays a complicating role. With the Fed’s balance sheet having already ballooned, there is growing unease in Washington about an unelected group of officials being so able to implement de facto fiscal measures with few checks and balances. I suspect that Fed officials realize this, and will likely resist further steps that would significantly erode their operational autonomy.

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• MarketWatch – All eyes on Bernanke, but QE3 has sailed
  With investor panic growing faster than the U.S. economy is weakening, all eyes turn to Fed chief Ben Bernanke this month to see if he will launch a third round of bond buying to prop up the global markets. Don’t hold your breadth, folks. The QE3 has sailed…The June swoon, or sell-in-May-and-go-away, or the end of the eight-best-months seasonal trading pattern, or whatever the jargon is for it on Wall Street, is a traditional Wall Street occurrence and this year investors are playing it up like it’s Lehman Brothers all over again…Investors would be wrong to hope Bernanke will ride to the rescue again with a third round of quantitative easing, or QE3, by buying Treasury bonds in bulk. Of course, the Fed will keep buying in some format, but the massive program itself will end this month and we’ll be on our own. In fact, the summer scare in the markets plays well into Bernanke’s strategy of preventing a crisis of no buyers of Treasury bonds when QE2 ends by delivering a steady supply of new buyers spooked about the outlook for stocks and commodities.
• Bloomberg.com – Fed May Signal Balance Sheet Will Stay at Record
  A wave of surprisingly weak data on the U.S. economy may spur Federal Reserve policy makers to support growth by making it clear they’re in no hurry to shrink the central bank’s record balance sheet. There’s a “strong possibility” that the Federal Open Market Committee will say following the June 21-22 meeting that it will keep reinvesting proceeds from maturing debt for a while, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. (JPM) in New York. Previously, the FOMC has said it will keep the benchmark interest rate near zero for an “extended period” without a similar pledge about its balance sheet…The slowdown may push policy makers to consider what options are left after their second $600 billion round of asset purchases sparked a Republican backlash. Saying the balance sheet won’t shrink immediately could dispel any notion that the Fed is about to push up borrowing costs.