In just a few short hours, the great debate of summer 2012 will come to a close when the Federal Reserve announces its intentions on whether or not it is embarking on another round of stimulus to jump-start our stagnant economy. In the weeks leading up to today's meeting, we've heard impassioned arguments as to why the Fed will or won't sign off on so-called QE3 as well as how the markets would react to various scenarios.
But now with the actual answer almost in hand, an entirely new possibility is not only emerging, but is fast becoming the consensus expectation. That's right, just when people thought Ben Bernanke had no more tools to work with, some say the 58-year-old central bank chief might just be on to something big. No, not QE3, as we've come to know it, but rather what I like to call "ease a la carte."
"I think they will [ease], and I think we will get both of the options discussed," says Michelle Girard, senior economist at RBS, in the attached video, predicting that the Fed will both bump its guidance on rates and authorize another round of bond buying — only of Treasuries and mortgage-backed debt this time.
This double whammy, Girard explains, differs in two key ways from previous rounds of easing.
"One of the new options and ideas that the fed has been bandying about is this idea of open-ended purchases, so you don't actually say out front how much you're going to buy or over what time period," she says. "You instead tell the markets look, we're going to buy X amount each month and [will] keep doing it until the economy shows a sustained and substantial pick-up," a phrase that borrows directly from the Fed's own meeting minutes that came out a few weeks ago.
To me, ease a la cart seems so logical, especially compared to the previous rounds of QE, which were advertised by date and size on the New York Fed's website. Girard says it's a reality that adds much-needed flexibility to the Fed. She points out that they can stop early if things end up performing better or keep as long as they think the economy needs it.
What's more, ease a la carte would also offer an element of surprise via its open-ended commitment.
"It's anybody's guess how big the package will be," Girard says, "and in that sense you can surprise the markets, perhaps, by ultimately getting more than anybody thinks we would right now."
Which means the Fed could be embarking on a trillion dollar spending spree or more (versus a $500 - 600 billion consensus) without having to say so or take the heat for doing so.
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