Did Fed Just Tip Its Hand To a Third Round of Easing?

Federal Reserve Chairman Ben Bernanke.
Mary Altaffer
Federal Reserve Chairman Ben Bernanke.

With a subtle wave of his baton, the aspiring Maestro may have started the music for another round of Federal Reserve monetary easing.

Ben Bernanke, chairman of the US central bank and keeper of the keys to stock market money flows, oversaw a tweaking of wording in the Fed’s post-meeting statement that had trading floors buzzing.

The statement, which preceded the chairman’s first-ever news conference following a Fed Open Markets Committee meeting, simply stated that the group will “ regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability.”

The change in wording was subtle, but for the market it was shorthand (or perhaps longhand, considering the chairman’s traditionally opaque language) that another round of quantitative easing—QE3 in market parlance—was on the way.

After all, the conditions remain ripe for more easing, at least according to the Fed's criteria. The central bank has lowered its growth estimates for gross domestic product and believes inflation levels are muted. So why not some more pump-priming?

In this case, though, it won’t involve the Fed printing more money to buy Treasurys and other debt, as in the first two versions of easing. Instead, it will simply sell the $1.365 trillion in accumulated toxic junk on its books and then use those proceeds to buy more government securities—in this case, likely a bit further out on the yield curve than the present shorter-dated targets.

The process was first outlined Mondayin a note from David Rosenberg, economist and strategist at Gluskin Sheff.

“That's what QE3 looks like, and you just got the tip of the hat from the FOMC,” says Dave Lutz, managing director of trading at Stifel Nicolaus. “Ben's Q&A just got more interesting.”

If that’s the case, it lends more credence to the notion that Bernanke is aspiring to the “Maestro” title of his predecessor, Alan Greenspan, who earned the sobriquet by virtue of his gentle molding of the financial markets—until, of course, the whole thing exploded with the financial crisis of 2008 and 2009.

In fact, the hint was so deft that it left Bernanke enough wiggle room to keep the QE momentum going—the market has rallied 90 percent off the Fed’s programs—without actually having to go another round.

Instead, the chairman could use the whiff of easing just to keep the markets on the line for another rally.

“The Fed took the chance that they could do this policy and keep it rather amorphous—QE is whatever you think it is,” says Kevin Ferry, president of Cronus Futures Management in Chicago.

The easing did not, in fact, have the actual dollar impact that many think, Ferry contends. Rather, it was a psychological tool used to goose the markets.

So is this just another mind game from Maestro Jr., or an actual liquidity infusion?

“Anyone will go on TV and tell you there’s going to be a QE 3, but none of them understand what QE 1 or QE 2 is,” Ferry says. “If people want to believe this (is QE 3) then the Fed is uncomfortably going along with it.”


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