As the US Federal Reserve approaches its historic two meeting next week which could see a second round of spending unleashed on the moribund US economy, there’s probably one last item on the organisation’s check list before a final decision is made.
And that’s tomorrow night’s first estimate of economic growth.
The weekly jobless claims fell overnight Thursday, but shares drifted because of the uncertainty about the Fed’s move.
This move is a big deal. The prospect of another easing has already jolted markets, sent the value of the Australian dollar and commodities higher and hit the value of the greenback.
A stronger than expected GDP reading (say above 2% annual, or around 0.5% quarter on quarter), might see the Fed decide to cut or slow the rate of release of the second round of quantitative easing.
A lower than expected reading of between 1% and 1.7% annual (or around 0.2%-0.4% quarter on quarter), will probably see a stronger commitment from the Fed, even though the first reading will be changed in the second estimate in a month’s time as trade, spending and consumer credit data for September becomes available and a more accurate look at stocks and consumption can be made.
But the way the debate in the Fed has gone there’s no doubt that there will be an easing, just doubt on the timing and the amount.
Bloomberg reported overnight that the Fed has been asking the US bond market for estimates on possible purchases.
"The Federal Reserve asked bond dealers and investors for projections of central bank asset purchases over the next six months, along with the likely effect on yields, as it seeks to gauge the possible impact of new efforts to spur growth.
"The New York Fed survey, obtained by Bloomberg News, asks about expectations for the initial size of any new program of debt purchases and the time over which it would be completed. It also asks firms how often they anticipate the Fed will re- evaluate the program, and to estimate its ultimate size."
The market started off thinking that it could be substantial, $US1.5 billion or more or more after the first round of easing totalled $US1.7 billion in late 2008.
Estimates for the size of the asset-purchase program range from $US1 trillion at Bank of America-Merrill Lynch Global Research to $US2 trillion at Goldman Sachs Group Inc., with economists at both firms agreeing the Fed will likely start by announcing $US500 billion after next week’s meeting.
Some commentators worry (as does the bond markets which has sold off heavily in recent days) that another round of spending will spark inflation.
The first round of easing saw inflation fall and unemployment rise, even though the economy turned the corner and moved out of recession in June of last year.
The easing managed to provide a cushion (and with other fed actions and the US Government stimulus and Tarp aid to the banks) stopped a depression from happening.
It is a very big ask to expect that a second round of easing will spark a surge in inflation when the output gap in the US (the difference between its potential and the actual level of production and activity) is around 5% – 7% at the moment, thanks mostly to the weight of the 9.6% unemployment rate.
William Dudley, president of the New York Fed and vice chairman of the Federal Open Market Committee, this week again said that current levels of US inflation (around 1%) and the 9.6% jobless rate were "unacceptable" and said the Fed needs to take action.
Bloomberg reported that he said "To the extent that we can do things to improve the economic environment, we certainly owe it to the millions of people who are unemployed to do so."
He said The Fed hasn’t yet decided whether to buy additional assets.
The markets have been adjusting to the easing, the US dollar has been sold off (up to the past couple of days at least) and bond yields have risen with the 30 year yield back around 4% after dropping well under that rate by early this month.
An index of the dollar versus six major currencies is down 4.5% since September 20, the day before the last Open Markets Committee meeting. Wall Street has risen nearly 4%. Investors think the easing will "save” them, but from what?
Bloomberg reported this week that "Economists Jan Hatzius at Goldman Sachs and Ethan Harris at Bank of America predict the Fed will spread an initial $US500 billion in asset purchases over six months. That is the figure mentioned in the Oct. 1 speech by Dudley, who said $US500 billion in purchases could have the same effect as cutting the benchmark federal funds rate by as much as a 0.75 percentage point."
The yield on the 30-year Treasury rose above 4% last Tuesday for the first time since August.
The yield on the 10-year bond is just over 2.70%, up from the low of 2.33% set at the start of this month.
If anything fears about inflation are misplaced, at least initially because that’s what the Fed wants to see happen.
It wants to see inflationary expectations boosted, so a deflationary mentality doesn’t take hold in business and among consumers as it has done in Japan for much of the last 20 years.
But with unemployment at such high levels (well over 14 million unemployed), millions of people losing or about to lose their homes to foreclosure, the continuing foreclosure mess itself, sluggish consumer demand across the board, the returning housing slump and the continuing political uncertainty and weak consumer confidence, it will be months befor
