Bloomberg.com – Pimco’s Gross Says Fed May ‘Hint’ at QE3 at April Meeting
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the Federal Reserve will probably signal it plans to arrange a third round of debt purchases when policy makers meet in April. The end of tax breaks enacted by President George W. Bush and $1 trillion of mandatory federal budget cuts are raising concern that declining unemployment will give way to slower economic growth that requires support from the central bank. Policy makers under Chairman Ben S. Bernanke have purchased $2.3 trillion of Treasuries and mortgage debt in two rounds of so- called quantitative easing, known as QE1 and QE2, as they try to sustain the expansion. The Fed is “likely to hint” at QE3 at its April 25 gathering, Gross wrote on Twitter.

Comment

Gross is so plugged in to the FOMC it is as if he is the de facto Federal Reserve chairman. His comments on Federal Reserve policy hold the same weight as the WSJ’s Jon Hilsenrath (aka “the Federal Reserve’s mouthpiece”).

Recall that the first tweet Gross ever sent told everyone to expect Operation Twist by fall, which is largely what happened.

In the last week, many members of the FOMC argued in favor of ending any form of QE, citing rising inflation expectations. See the story below.

Gross is telling us to ignore this sentiment. The printing presses are still on and another edition of QE is coming.

How will the market take this? Will it embrace risk assets (stocks) because more money printing is coming or will it worry that the Federal Reserve is going too far and inflation is coming back?

We fear the latter. As we have pointed out before, traders now have a better grasp on the effect of QE on the markets.

Stocks peaked seven weeks after QE1 ended (the market was slow to understand QE)
Stocks wised up and peaked three weeks before QE2 ended

Following this pattern, we have argued that this time stocks will peak on the announcement of QE3. Is the hope of QE3 one of the supporting reasons the S&P is up 11% YTD? In other words, has the market already experienced the QE3 rally (buy the rumor) and will its announcement mark a peak in risk assets (sell the news)?

If we are correct that stocks (risk assets) fail to advance on more QE, inflation fears will be cited as the reason.

Bloomberg.com – Fed Purchases of More Bonds Opposed by Two Regional Presidents
Two Federal Reserve district bank presidents said the strengthening U.S. economy is reducing the need for additional monetary easing. “As the U.S. economy continues to rebound and repair,” additional steps “may create an overcommitment to ultra-easy monetary policy,” St. Louis Fed President James Bullard said in a speech yesterday in Hong Kong. Atlanta Fed President Dennis Lockhart said in Washington that “we should hold the balance sheet where it is for the time being and watch how the economy evolves.” The remarks from Lockhart and Bullard, who have never dissented from a decision by the Federal Open Market Committee, reflect broadening sentiment on the panel against further steps to spur growth. The Fed has held interest rates near zero since 2008 and purchased $2.3 trillion in bonds to spur growth after unemployment rose to as high as 10 percent in 2009. The jobless rate is now 8.3 percent, and the economy has been expanding for more than two years.

Click to enlarge:

Source: Bianco Research

Category: Federal Reserve, Markets, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

7 Responses to “Is QE3 Coming?”

  1. Concerned Neighbour says:

    Alas this is the only question that has any bearing on the marketplace – such as it is – any longer: what will the central banks do?

    I believe the 11% rally is due to the LTRO, and I fully expect the Fed to be passed the baton for QE3 shortly, inflation be damned. If the Fed truly cared about inflation, they’d be quaking in their boots about inflation expectations now significantly higher than their alleged 2% target, and at the very least tamping down expectations of QE3. Instead it seems like every downtick in the S&P 500 (err economy) brings about more Fed statements on the need for more stimulus. BTW, how many times has QE3 been priced in by now? I’ve lost count.

    Despite their statements to the contrary, I believe the Fed wants inflation – big-time inflation. It will make their absolute murder of savers complete, which is their implicit goal.

  2. NMR says:

    Gross de facto fed chairman? Count me sceptical. Ditto QE 3.

  3. Iamthe50percent says:

    Yes, Concerned Neighbour, Bernanke is Greenspan’s pupil. The Fed’s goal is no longer full employment. It is bigger profits on stock options.

  4. GeorgeBurnsWasRight says:

    You have to wonder if Gross and Hilsenrath are getting insider info. I guess if you have enough clout this isn’t a problem.

  5. siltnamiai says:

    I believe the 11% rally is due to the LTRO, and I fullysiltnamiai expect the Fed to be passed the baton for QE3 shortly, inflation be damned. Yes thats really true….

  6. ExpectingDeflation says:

    It actually makes sense. With Treasury and FHFA approving HAMP2, there may be a massive amount of mortgage refinancing demand. With rising demand and already (slowly) rising interest rates, there may be a worry about a sudden upward swing in 30-year mortgage rates. In comes the Fed to the rescue. If this is true, it would basically be everything the Fed can do on housing.

  7. MTPockets says:

    What index or measure are you using for ‘stocks’ here as doesn’t tally with how I see it looking at the S&P close for example, where stocks peaked three weeks after QE1 (11/08-03/10) ended and one week after QE2 (11/10-06/11) ended?