Top 5 takeaways from the Fed that signal QE3 is ‘coming soon’

Pamela Heaven | Aug 22, 2012 3:47 PM ET | Last Updated: Aug 22, 2012 3:58 PM ET
More from Pamela Heaven | @pamheaven

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The U.S. Federal Reserve is likely to deliver another round of monetary stimulus “fairly soon” unless the economy improves considerably, minutes from the central bank’s August meeting show.

Here are the top five takeaways from the minutes, according to Scotia Capital economist Derek Holt.

1) Strength in numbers: The number of Fed members who think more QE will be needed “fairly soon” has moved from “a few” to “some” and now to “many members.”

2) Will economic data before the Fed’s September meeting change the “many” back to a few? Holt doesn’t believe so.

”The upsides have come through ADP, nonfarm, trade, retail sales, industrial production, the Philly Fed and home sales. That seems like an impressive list, but the pace of job growth is still disappointingly slow and so progress on the unemployment rate has stalled and that speaks directly to the full employment half of the dual mandate,” he said.

Improvements in retail sales have been volatile and though the Philly Fed has risen it is still in the red. On the downside is ISM, factory orders, housing starts, the unemployment rate, Empire, and CPI.

”Thus, on net, I’m not convinced that the tone of the indicators has improved enough in the wake of a very soft Q2 GDP report that might get revised up a tick or two to still one-handled growth and that will give way to something in the 1.5-2% range for GDP growth into Q3 in order to lead the ‘many’ to rethink their positions into the September 13th FOMC.”

3) Long-term view: Looking ahead to the end of 2014, many members expect that the jobless rate will still be higher than normal and inflation at or below targets.

“Thus the FOMC members are telling us they are less worried about near-term volatility and more concerned about the longer term picture,” said Holt.

4) Concern about vulnerability to future shocks. The minutes reveal that a “number” of members are worried that if the modest rate of growth continues the economy will be less able to weather a “material adverse shock.”

“In other words, some FOMC members likely fear that today’s weak growth will turn into a recession if oil prices spike, China suffers a hard landing, the euro crisis exacerbates, the fiscal cliff materializes etc.,” said Holt.

5) If the Fed were to pursue additional QE, how would it do it? Holt said a nod to open-ended QE is on page 8 of the minutes: “Many participants indicated that any new purchase program should be sufficiently flexible to allow adjustments, as needed, in response to economic developments or to changes in the Committee’s assessment of the efficacy and costs of the program.”

http://business.financialpost.com/2012/08/22/top-5-takeaways-from-the-fed-that-signal-qe3-is-coming-soon/