Today the lights are almost certain to go dark on the market’s favorite letter/number combination: QE3.
The Federal Reserve’s rate-setting committee, the Federal Open Market Committee, concludes its two-day meeting this afternoon, with a policy statement but without a press conference. The biggest takeaway is the widely expected announcement that the Fed’s third round of quantitative easing will conclude this month as scheduled. The market will also be engaging in its usual tea-leaf reading exercise with the statement, looking to see if two key phrases are still there: “considerable time” and “significant underutilization.”
The first refers to the amount of time after the end of QE3 before the Fed expects to raise interest rates. The second refers to the perceived slack in the labor market. Alterations to either phrase have the potential to move the market.
Since cranking to life in 2012, QE3 has resulted in more than $1.5 trillion worth of bond purchases from the central bank, taking its balance sheet from under $3 trillion to about $4.5 trillion. Before the crisis started, the Fed’s balance sheet was under $1 trillion. How it unwinds that bloated asset base – and how that effects the markets and the economy – is a big question, but one that nobody’s very concerned about right now.
The market seems pretty copacetic with the whole thing, in fact. For one thing, there’s already been some jawboning about extending or renewing bond-buying. For another, the bank has made it pretty clear it views QE as something it can crank up when it feels the need. In other words, the message to the market continues to be that the proverbial Fed Put is still in place.
Here’s what the market is thinking ahead of today’s meeting.
Peter Boockvar, chief market analyst, Lindsey Group: Outside of the official end of QE today, we're back to parsing the wording of the FOMC statement. "Considerable time" has been rendered worthless in telling us anything of significance as Yellen in her last press conference backed away from it and said to focus on the data. Also, three weeks ago Stanley Fischer said "considerable time" can be anywhere from two months to two years. "Significant underutilization" is the key to watch and whether it stays in.
Notwithstanding 14-year lows in jobless claims, 13-year highs in job openings, and a 5 handle on the unemployment rate, Yellen & Co. will likely leave these two words in because they still believe in the excess supply of labor that is just waiting to jump back in to the labor market. This belief has proven to be false as seen in the participation rate which is not reversing. Short term interest rates belong higher but we know the Fed is afraid of reversing the monster they created.
Joan McCullough, Longford Associates: Just because they formally end QE 3, doesn't mean that they can't institute QE 4. If they see fit. Should that, er, necessity arise, they can always save face by drumming up another name or acronym…He who has the magic wand, has all the power.
Ed Yardeni, president, Yardeni Research: The FOMC statement this afternoon isn't likely to pull any tricks. Given the strength in stock prices so far this week, investors might be expecting some treats. It's likely that Fed officials were spooked by the violent selloff in stocks earlier this month. So at their pre-Halloween two-day meeting that ends today, they might decide not to surprise the markets one way or the other now that stocks have rebounded. In other words, there might not be any significant changes in the language that appeared in the previous FOMC statement on Sept. 17. If so, then no news should be good news. Of course, the FOMC will state the obvious: QE has been terminated.
Kit Juckes, forex strategist, Societe Generale: Along with the majority of observers, we expect a final $15 [billion] cut in the Fed’s monthly bond purchases, and no meaningful change in the language from the FOMC statement. There will be no new dots, no new projections and no press conference. It should be a non-event, and you wouldn’t rule out another rise in equity indices around the world given the recent momentum.
Chris Low, chief economist, FTN Financial: Bond buying has likely moved from the extraordinary to the ordinary part of the Fed's tool kit, ready to be rebooted the next time the Fed thinks the economy needs a boost from the zero bound.
Guy LeBas, chief fixed income strategist, Janney Montgomery: We expect the Fed will allow QE3 to end as planned, particularly since the effects of this termination are largely priced into the markets. The FOMC statement will likely emphasize in stronger language, however, that the Fed is continuing to reinvest principal proceeds from their current portfolio. The barrier for QE4 will likely be very high, though a further deterioration in inflation expectations and current period inflation could do the trick.
The end of QE and reduced prospects for more of the same mean that the timing and pace of rate hikes will be the primary policy tool for the Fed.
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