Fed Chief Paves the Way for More Easing—Just in Case
By: Patti Domm | CNBC Executive News Editor
Markets have been expecting the Fed to carry out QE3 (learn more), a third program of asset purchases. Fed watchers believe in the next round, the Fed would buy a blend of Treasury bonds and mortgages. It currently is conducting Operation Twist, a program under which it buys long term Treasury securities and sells shorter duration securities, which does not expand its balance sheet like it does in QE.
Ader said Bernanke’s comments on the unemployment situation were particularly strong. Employment is one of the Fed’s dual mandates (the other being inflation). Bernanke blamed high unemployment on the financial crisis and said the economy is constrained by fiscal policy.
“The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years,” Bernanke said.
On Thursday, Atlanta Fed President Dennis Lockhart told CNBC’s Steve Liesman that the Fed could take action if monthly job creation fell below 100,000, but for now more easing is a “close call.” The July jobs report showed the creation of 163,000 non farm payrolls, and the expectations for August are about 120,000 new jobs.
Ader said Lockhart has now signaled what level could be a trigger, and markets will be watching the employment report closely for a break below 100,000. “The real questions is, we know the triggers, but the timing. Is it September? Is it November? or is it later on?” he said.
Later in the year, or early next year would make sense since the Fed would then know what was happening with the fiscal cliff. the so-called fiscal cliff is the dual expiration of Bush tax cuts Dec. 31and the start of automatic spending cuts that would take place if Congress does not act before then. The Fed has warned that Congress must take action on fiscal matters.
“If you look at the FOMC minutes, 10 times they talked about the fiscal constraints here and in Europe, the pending austerity,” Ader said. “My bias is he’s going to keep it out there. The forward guidance will come first, and they’ll wait for the new year to see if something happens on the fiscal cliff side. If we have two or three months of sub 100,000 job growth, that seems to be a trigger.”
RDM Financial strategist Sheldon said if the Fed or European Central Bank takes away the promise of more easy policy, the market would react negatively.
“Given the nature of the recent economic data," he said, "it’s unlikely that the Fed will release additional QE. We need weak data for the Fed to take action.”
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