The Only Way the Fed Can Surprise Markets Is to Disappoint Them


The minutes may have been stale, the Jackson Hole speech uncertain, but the August payrolls report last Friday was crystal clear in its warning on jobs. Not only was it unexpectedly bad, but by most accounts it was the clincher too, at least as far as decisively moving the hand of the Fed to deliver another round of easing or QE3 when they meet Thursday.

"I think we will see something this week," says Mark Luschini, chief investment strategist at Janney Capital in the attached video. "The Fed wants to stay ahead of employment growth."

Of course the question that traders and investors want answered most right now is if, and how much the next round of easing is already baked in to the market. "To some degree I think it is," Luschini says, adding that to surprise the market now "would be to do nothing."

And let's be clear, if that happened, it would not be a positive surprise. Luschini does however, leave room for the unexpected and says "there's always an element of surprise" when it comes to Fed announcements, adding that QE3 would still provide some lift, but would not be long-lasting.

Beyond another expected half trillion in bond purchases, Luschini and others will be watching (and listening) for other actions too, such as what he calls "communicative easing", which is to say the Fed will "extend the duration while holding down interest rates into 2015, or go from a date-dependent scenario to a data dependent scenario."

Even so, he cautions investors not to expect too much in terms of earnings or economic benefits.

"Businesses at this juncture aren't making decisions over investment or hiring over lower interest rates," he says, pointing out that macro concerns like global demand, slowing growth, as well as the fiscal cliff, possess greater threats.

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