A Few Pre-FOMC Thoughts
Although Bernanke said the cost/benefit analysis of further QE is not justified, the Fed simply cannot afford to deprive markets from any remaining stimulus, especially at a time when fiscal policy has run outcourtesy of Republicans insistence of using only spending cuts, ruling out any tax hikes. The 4 options for the Fed are 1) more QE, 2) cutting interest on bank reserves in order to force them to lend; 3) Operation Twist whereby selling short-term treasuries & buying long term ones in order to flatten yield curve; 4) adding TIME .
4) adding TIME .element to statement by indicating Fed will hold securities for an extended period of time, or simply say they will not start selling UNTIL..GDP growth or inflation show marked improvement. The Fed could also further downgrade its growth forecasts in order to trigger mkt expectations that more further stimulus lies ahead. The Fed can use the Aug 26 Jackson Hole economic symposium of world central bankers and economists to deliver an inter-meeting policy change (if markets selling off hard as was the case in August 2007). REGARDLESS, most fixed income traders (not necessarily economists) are persuaded that a double dip is around the corner, and only full-fledged QE3 will help support stocks. ANY SIGN that Bernanke will not show this, would weigh on equities and place a temporary cap on metals to the benefit of the US dollar.
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