Once you have bared it all, repeatedly, there is little novelty or excitement left. After last month’s FOMC decision when the Fed went all in, this meeting has low expectations for the market. Here is what to look for, and how I think markets will react.
No Change in Size of QE
The $85 billion was such a “finger in the air” made up number, that there is no reason to change it yet. They have no clue whether any number will work, so it is too early to fiddle with this. I think an announcement that they are increasing the size would be viewed as a mild positive, but would lead to some questions about whether it is working and what does the Fed know, and probably create some Republican backlash. Shrinking the number would be bad for markets. I would expect a bigger downside move on a decrease in size (than upward move on increase) because it would signal that policy isn’t working, and would reduce the QE must inflate stock market argument (less QE money).
In any case, I don’t expect anything on this front.
Low Rates to Eternity
Honestly, I can barely remember how long rates are going to be low for. Is it 2015 now? Sure. To me this doesn’t make a difference as I don’t believe we are going to return to strong economic growth any time soon, so the overnight rate will remain low, because the fed does look first and foremost to the economic growth. At the same time, if we somehow get growth or real inflation, the Fed will hike this rate.
Not looking for any new language here, if anything is likely to be even more dovish than last time, but don’t see that having a big impact.
Adding Treasuries to the Mix
It wouldn’t surprise me if the Fed added treasuries to the mix of what they spend their $85 billion on. I think it is too early for this meeting, but could happen. If they do add treasuries, it will be a function of supply. They can’t necessarily source that much mortgage paper or are actually concerned they would distort that market too much, so they need to use the ever growing supply of treasuries to sop up some of their QE money. Adding treasuries is definitely not a positive, and might be mild negative, since QE would be viewed as having less impact on mortgages than otherwise, and in theory some less influence on housing.
In the end, whether they announce that they will spend some of the money on treasuries rather than just mortgages seems like a non event. Treasuries may rally a bit, and stocks, particularly homebuilders might sell off a bit, but I don’t see it being a big deal either way.
Jobs – Mission Accomplished?
I think not. The unemployment rate came down, but the household survey is notoriously inaccurate (and had job losses in July and August) and Bernanke is smart enough to know this. With actual NFP and ADP, and even the “adjusted” household survey all coming in around mediocre levels there is no justification to cut the QE for Jobs program yet. In my dream world someone at the Fed will actually question whether monetary policy and QE can create jobs, but that seems highly unlikely – at least in the public statement.
I expect dovish language on the QE for jobs front. The Fed will continue to express concerns about the labor market. This will be mildly positive for the market, but nothing new.
I think not. The CRB closed at 317 on Fed day last month. It rose to 321 the next day, but has generally drifted lower since then and is back at 299, a level not reached consistently since late July. So as much as everyone wanted to believe that the QE was inflationary (and it is long term), the Fed can point to a lot of data showing that there hasn’t been any large impact on commodity prices. We need to see real final demand, driven by a growing economy to see widespread inflation, or at least more months of QE flooding the market with new money.
I think they will remain skeptical of any inflation, and maybe even highlight that QE has produced no signs of inflation. The more aggressive they are on this front, the better the market will react. Again, so much is already priced in, they can’t do too much, but an extremely optimistic outlook on inflation would be a sign that they are prepared to act even more aggressively.
I am having trouble putting myself in the shoes of the Fed voting members. I know that I personally would want to go on record questioning the validity of monetary policy in the effort to create jobs. That I would question whether we are distorting markets and money supply to the point that it is actually hampering growth rather than encouraging risk taking. That while inflation hasn’t yet hit, it could and that I am uncomfortable growing the money supply, when it is not obvious that there is any real positive impact in the economy.
But I’m not a voting member. So what I think and what I would like the statement to say is irrelevant.
In the end, I can’t help but think this is a potential wildcard. I think there is a real possibility that some member will dissent or vocalize a strong opinion. That would be a negative because it would question how long “unlimited” QE can last. Open ended might not be so open ended.
With everything else going on in the market, this would add significantly to the selling pressure.
I come into today bearish. I continue to think we break 1,400 and can get to 1,375 on the S&P 500. Nothing about what the Fed is likely to do today (in my opinion) changes that conclusion and there is a possibility, albeit small, that they do some damage to the market with their opinion. As I sent out yesterday afternoon, I am less bearish at 1,415 than I was at 1,460 or even 1,435. I would look to cut the short opportunistically on sell-offs, but only aggressively if we break 1,400. On strength going into the Fed, I would look to add to the short, but not sure we will see much real strength.