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15th Sep.

Fed still a long way from announcing new QE
 Resistance of some officials to new asset purchases remains resolute

 Unemployment rate is probably the key
 Even if Fed did go for more QE, impact would probably be muted

The slightly stronger tone of the incoming however, the ISM manufacturing index rebounded
economic data in the past few weeks should have slightly and retail sales enjoyed a solid gain. All
dampened speculation that the Fed will soon things considered, the dangers of a double-dip
countenance a second round of quantitative recession have undoubtedly receded since the
easing (QE). That said, the bond and equity Fed's meeting in August, so the chances of a new
markets still seem to be bewitched by the bout of QE being announced next week would
possibility that the Fed could resume its asset seem to be remote.
purchases within another few months. We don't
Nevertheless, if we are right and GDP growth
anticipate any major announcement at the next
staggers along at an annualised pace of roughly
FOMC meeting next Tuesday (September 21st). We
2% through the rest of this year and in 2011 as
doubt the statement accompanying the decision
well, the pressure on the Fed to act to boost that
will change much either, continuing with the
growth rate will only keep growing. Whether Fed
downbeat assessment adopted at the meeting in
officials succumb to that pressure will probably
August that the pace of recovery has slowed and
come down to what happens to the
will remain modest in the near term.
unemployment rate.
According to press reports shortly after the meeting
Our central view is that productivity growth will
in August, seven of 17 Fed officials expressed
slow to an annualised pace of roughly 1%, which
reservations about, or outright disagreed with, the
means that GDP growth of 2% would be just
decision to reinvest the proceeds from maturing
strong enough to prevent the unemployment rate
mortgage-backed securities into Treasury
from rising any higher. Under those circumstances,
securities. If there was only a small majority in
the Fed might resist the pressure for more QE,
favour of preventing the Fed's balance sheet from
although it is by no means guaranteed.
shrinking at a fairly rapid pace, there would seem
to be little prospect now of the FOMC agreeing on If we are wrong, however, and either GDP growth
an actual expansion of that balance sheet, at least is weaker or productivity growth is stronger, then
not unless economic conditions deteriorated the unemployment rate would presumably climb
markedly. above 10% again. If the unemployment rate starts
to rise, we suspect that the Fed would have to act.
The incoming data suggest a double-dip recession
is a remote prospect, at least for now. The Fed's Would more QE actually work?
own Beige Book of anecdotal information, In his recent Jackson Hole speech, Fed chairman
published earlier this month, did warn that there Ben Bernanke was fairly emphatic in his
were widespread signs of a deceleration in the declaration that "the issue at this stage is not
pace of economic growth. The private sector whether we have the tools to help support
added a respectable number of workers in August, economic activity and guard against disinflation.

Fed Watch 1

but we doubt they would have Fed expanded the scale of its asset purchases in any significant impact on the wider economy. unless we're wrong and measure of M3 did expand quite sharply in the the unemployment rate begins to rise.0 6. at 2008.0 2. more QE. but fallen further since the Fed stopped buying assets households and businesses have remained in March this year. The impact of quantitative easing on the broader We don't expect the Fed to announce a second monetary aggregates is just as inconclusive.5 uncertainty surrounding the strength of demand. Treasury yields QE Starts QE Stops and mortgage rates did fall sharply in the 13000 13000 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 immediate aftermath of the Fed's original announcement in later 2008.) When the Fed stopped unless the Fed was willing to go for broke and buy buying assets in March this year. Those aftermath of the Fed's initial announcement in late purchases might lower long-term interest rates.0 qualify." While we accept that the Fed might be yields.5 3. it is more likely that quantitative easing.) The impact on the real economy could be even Treasury yields and mortgage rates have actually smaller.5 from lower rates by refinancing because the other 4.5 5. they already QE Stops QE Starts 4. (See Chart 2.0 5. that 13200 13200 evidence is far from conclusive. Rates are already very low. any new asset purchase programme would be much smaller than that and consequently prove The upshot is that while the announcement of a to be ineffectual. 14200 14200 Bernanke also argued in Jackson Hole that "the 14000 14000 evidence suggests that the Fed's earlier program of 13800 13800 purchases was effective in bringing down term 13600 13600 premiums and lowering the costs of borrowing in a 13400 13400 number of private credit markets." However. Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 so lower corporate bond yields are unlikely to Source – Thomson Datastream make much of a difference. when Fed officials are still intent first announcement. unusually reluctant to take advantage. If 4. Our round of asset purchases. new large scale asset purchase programme might have a temporary downward impact on Treasury Paul Ashworth Tel: +1 416 413 0428 Fed Watch 2 . broad money on weighing the benefits of asset purchases started to rebound shortly after the Fed stopped its against the potential costs.5 2.0 half don't have the 20% home equity required to 3.5 have enough cash on hand to fund that expansion.5 10-Year Treasury Yield (RHS) 4. not March 2009.0 they did opt to boost investment. Ironically. was actually lower than it was when it made that Unfortunately. (See Chart 1.0 1. Businesses are paralysed by the 5.We do. that it would begin Source – Capital Economics buying mortgage-backed securities. 7.0 30-Year Mortgage Rate (LHS) Only half of mortgage borrowers could benefit 6. there is no guarantee that impact will be able to drive long-term rates a little lower using sustained. the level of M3 in excess of $1trn of Treasury securities. but it began to shrink again shortly after the least temporarily. we are not convinced that lower rates CHART 2: CAPITAL ECONOMICS' M3 MEASURE ($BN) would boost the recovery. Many households are constrained by the size of debts CHART 1: TREASURY YIELDS & MORTGAGE RATES(%) already accumulated and past asset price declines.

Philadelphia Christine M. to allow for more discussion of the issues.25%) November 3rd .25%) September 21st No Change (Rates at 0% to 0. The FOMC is responsible for interest rate policy.25%) Sources – Federal Reserve Board of Governors. Hoenig.16th No Change (Rates at 0% to 0. and moderate long-term interest rates. the Board of Governors has responsibility for quantitative easing. Plosser.25%) December 15th .25%) August 10th No Change (Rates at 0% to 0. Evans. Board of Governors William Dudley.27th 2010 No Change (Rates at 0% to 0. First Vice President.25%) June 22nd. Chairman Ben Bernanke.25%) April 27th. Disclosure of Voting Yes. Full transcripts of FOMC meetings are published with a five-year delay. Dallas Narayana Kocherlakota.25%) January 26th. Boston (Janet Yellen is awaiting a full Senate vote to approve her nomination as Vice Chairman of the Board of Governors. Cleveland Eric S. Policy Framework The Federal Reserve Act instructs the FOMC “to promote effectively the goals of maximum employment. Capital Economics Fed Watch 3 .” That makes the Fed unusual in having a dual mandate. Board Of Governors Kevin M.28th No Change (Rates at 0% to 0. Louis Thomas M. Rosengren. stable prices. all extraordinary credit facilities and the size/composition of the Fed’s balance sheet. Cumming. Meetings have traditionally lasted one day. TABLE: FOMC BACKGROUND INFORMATION Interest Rate Meetings The Federal Open Market Committee (FOMC) holds eight regularly scheduled meetings a year. Membership of FOMC The Federal Open Market Committee (FOMC) consists of 12 members: the seven members of the Board of Governors of the Federal Reserve System. Release of Minutes Yes. minutes are published three weeks after the meeting. and four of the remaining 11 Reserve Bank presidents. Chicago Richard W. Warsh. New York James Bullard. But more meetings are being held over two days now.0% as consistent with price stability.23rd No Change (Rates at 0% to 0.5% and 2. with a rate announcement on Wednesday. St. Minneapolis Charles I. the president of the Federal Reserve Bank of New York. Sarah Bloom Raskin and Peter Diamond are awaiting Senate votes to approve their nominations as Members of the Board of Governors. Board Of Governors FOMC Daniel Tarullo. but the Fed’s long-term forecasts suggest that it sees a PCE inflation rate of between 1. meaning that it meets once every six weeks. Kansas City Sandra Pianalto. normally a Tuesday. Inflation Target No formal target.4th No Change (Rates at 0% to 0. ) Alternate members Charles L. However. full breakdown of vote announced in accompanying statement. Board of Governors Vice Chairman Position vacant Other members of the Elizabeth Duke. on a rotating basis.25%) December 15th-16th No Change (Rates at 0% to 0. New York Meetings Date Outcome / Our Forecast November 3rd-4th No Change (Rates at 0% to 0. beginning each January.25%) March 16th No Change (Rates at 0% to 0. who serve one-year terms. Fisher.