Fed Move Unusual When Stocks Are Hitting Multi-Year Highs
Wall Street widely expects a new round of quantitative easing Thursday, but if the Fed were just looking at the stock market – nearing a five year high – it may not see the need.
“They haven’t tended to blow out a big new program when the markets are near highs. They kind of hold off, and they save it for when they have to come to the rescue,” said Stuart Freeman, chief equity strategist at Wells Fargo Advisors.
“I would be inclined to think if they do something, they might suggest they’re going to do something much smaller than they have in the past and say they’ll re-evaluate it on a regular basis.”
The Fed winds down its two day meeting Thursday, with a statement at 12:30 p.m. ET. It then issues revised economic forecasts at 2 p.m. followed by a press briefing by Fed Chairman Ben Bernanke.
An exclusive CNBC survey showed that more than three-quarters of the 58 money managers, strategists and economists who responded believe the Fed will announce a new program of quantitative easing, or asset purchases, after the September meeting. Another 86 percent believe the Fed will announce that it will purchase a mix of Treasurys and mortgage-backed securities when it does launch its third QE program.
The expectations for QE3 have been running high all summer, as the stock market rose. But a dismal August jobs report last Friday turned around even some non-believers. Ironically, the CNBC survey showed a majority do not expect QE3 to help lower the unemployment rate.
The Dow Wednesday rose 9 points to 13,333, its highest close since December, 2007. The S&P 500 was up 3 points to 1,36, and the Nasdaq was up 9 at 3,14.
Freeman said the market will likely sell off if the Fed disappoints by delaying a QE announcement.
“There’s a faction that’s probably been buying on that expectation. Certainly we haven’t had a gang buster economy, or gangbuster employment growth, but what we have had - and one reason I think this market is moving up - is declining inflation, declining interest rates around the world, and declining materials prices,” Freeman said. “A lot of that is that demand around the world is soft…Typically these are things that make business work a little better.” Quantitative easing has been credited with sending investors into risk assets, like stocks and commodities. But it has also been blamed for triggering commodities inflation.
Freeman said he’s not 100 percent convinced the Fed will act Thursday, and he points to the stock market. “You can see the cyclicals outperforming over the defensives now on a 12-month basis. That’s speaking to the kind of stocks that are moving. That’s speaking to the breadth of the market. The point is capital is not just flowing into the market, but capital has been,” he said. “Some of these lower inflation rates, lower oil prices, lower interest rates all around the world - those are things that should help strengthen business next year, and the market is paying attention to those factors. We didn’t have that a year ago.”
Even though some economists believe the Fed should hold off on a new program, they see Bernanke as anxious to get the program in place before the economy faces the “fiscal cliff” in the fourth quarter of the year. The fiscal cliff is the dual expiration of the Bush-era tax cuts and the automatic spending cuts that will hit the Federal budget Jan. 1 if Congress does not act. They also say the Fed will try to help the housing recovery by buying mortgages, hopefully getting more traction by aiming at market that has already started to heal.
Goldman Sachs economists, in a note Wednesday, acknowledge it is surprising that the Fed would want to act now given greater stability in economic data; improvement in Europe; easing financial conditions and the presidential election.
“One possible explanation is that the committee has shifted to greater concern about the fiscal policy outlook and the possibility of substantial drag from this source in early 2013,” they wrote. “Another possibility is that it has simply taken the committee some time to react to the deterioration in the data and outlook that took place during the spring and early summer.”
Some Fed watchers expect to see an open-ended program that the Fed can adjust as needed. In the past, the Fed has set a time frame for purchases and has bought just Treasury securities.
The Fed could also end its Operation Twist program, and some expect the program to morph into QE3. In Twist, the Fed buys longer-dated Treasury securities in an effort to hold down rates, but then sells an equal amount at the short end of the curve so as not to expand its balance sheet.
The Fed is also widely expected to extend the time frame for its zero rate policy into 2015, from mid-2014, and another less likely option would be to lower the interest rate on reserves.
Besides the Fed, there is jobless claims data and PPI inflation data at 8:30 a.m., and a 30-year bond auction at 1 p.m.
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