Fed and QE3 (FXA)
St Louis Fed Pres Hoenig told Market News in and interview that while he favors an early exit from easy money (voted much of last year for rate hike as a minority dissenting voter on FOMC), he said the Fed would consider QE3 if the data disappoint.
I think the market is not really thinking in these terms now…most assume QE2 ends and that is it, with some later start of liquidity drains (sterilization) and in time rate hikes (deposit rate on excess reserves, Fed funds rate and Discount rate.) So my premise is that markets will see even signs that the Fed is considering QE3 as an option (recall the Fed’s basic premise…economy is not growing fast enough to reduce unemployment and increase the rate of core inflation and that premise is still fully operative even with the deceleration in price level moderating and growth picking up speed) is an “event” for asset prices, FX and commodities.
I can’t help but read into Hoenig’s remarks that this debate has already begun…it should as QE2 is expected to end in June assuming the current pace of bond purchases is maintained. I said earlier today to FXA On-line customers in a note that we should be on alert for hints of the Fed’s internal debate on whether to continue with QE beyond June and that this could impact markets even if the Fed chooses not to deploy it. I also said we should look for something from one of the main Fed print reporters in coming weeks. Well Hoenig may have (deliberately) let the cat out of the bag today to try and influence the debate inside the Fed…QE2 is highly controversial to begin with and increasingly a politically partisan issue in Washington and on the airwaves, editorial pages. Hoenig may be trying to build outside” pressure on the Fed (Bernanke) to end QE with the $600bln and begin exiting unconventional measures soon. I also believe that Yellen for one will back ahead – a third iteration and she probably won’t be alone. Hoenig may also have forced Bernanke to address QE3 on Thursday in his speech to the National Press Club…last time he took questions for the first time from the press in public (first for a modern Fed Chairman if I am not mistaken). So think the QE3 debate is likely already raging inside the Fed and if I am right about markets, few people are thinking about it and the implications.
David Gilsp;
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