In QE3 waltz, Fed again steps toward easing
On again, off again. That’s been the story with prospects for another round of monetary stimulus from the Federal Reserve. Expectations for a third installment of quantitative easing, the much-debated QE3, had ebbed with improving economic data in the first quarter – but are now flowing anew.
Following a weak employment report for last month, the latest hint that more bond buys could be in the offing came from minutes of the central bank’s April meeting, which saw the Fed leave rates near zero and repeat that it would likely hold them there until at least late 2014. Policymakers appeared to be taking an increasingly dim view of economic prospects given an array of looming threats to growth, even if none are particularly new.
According to the minutes:
Participants identified several downside risks to the projected pace of economic expansion, including the fiscal and financial strains in the euro area and the possibility of an abrupt fiscal consolidation in the United States.
To Millan Mulraine at TD Securities, the more negative tone suggested a modestly greater inclination to lean in the direction of easing. In particular, Mulraine singles out this sentence in the minutes:
Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough.
Interestingly, while the former condition was also considered to be a threshold for more stimulus, the wording of the second condition suggests that the line in the sand for action may be the need to mitigate the contagion risks from Europe, and may no longer require the realization of the downside risk as a trigger for action. That is, the Fed may be willing to take further action to insulate the economy from the risks if the probability of a disorderly outcome in Europe increases sufficiently. We see this as somewhat more dovish.
For now, markets will have to keep on dancin’.