By the time the week is out, the Federal Reserve likely will make it clear whether it believes another intervention in the bond market is needed to support the U.S. economy.
Traders and investors can't know for sure right now what the central bank will do, but a number of economists are convinced a third installment of quantitative easing is nigh. On Monday, economists from three of the world's biggest banks spoke at New York University's Leonard N. Stern School of Business, and each said they're expecting some kind of action from the Fed in the days ahead, perhaps at the end of the Federal Open Market Committee's two-day policy meeting on Thursday.
However, it's important to note that, though they're predicting the FOMC will unveil some plan, their forecasts for the actual impact on markets and on the economy were fairly muted.
"I'm a little bit skeptical about the effects of QE on equities," said David Greenlaw, Morgan Stanley's chief U.S. fixed income economist.
Jan Hatzius, Goldman Sachs' chief economist, said he's looking for another asset purchase and a pledge from the Fed that it won't hike the fed funds target rate until mid-2015 or even later. But that doesn't mean he's counting on it being a cure-all.
"We do think it's going to have some effect," he says. "We don't think it's going to be a major boost." In order to be truly measurable, the Fed needs to announce unlimited purchases, Hatzius said.
Were it to do so, the U.S. bank would be following an announcement from European Central Bank President Mario Draghi last week that he and his colleagues were planning a bond-acquisition program meant to keep rates low in the euro zone's weaker nations, namely Spain and Italy. The ECB's proposal comes with conditions, but not with a specific amount of purchases planned.
Meanwhile, Peter Hooper, chief economist at Deutsche Bank Securities, said QE this week is in fact likely from the Fed, but the trouble is it "will exacerbate the exit challenges they face down the road."
Since the 2008 financial crisis, the Fed has undertaken three big steps in the bond market. The first was the original QE, which involved the purchase of more than $1 trillion of mortgage securities. The next was QE2, a $600 billion Treasury buy. That was followed by Operation Twist, a $400 billion Treasury swap that was later extended by another $267 billion.
Essentially, there are two camps when it comes to QE. Supporters of past and future Fed actions believe the central bank has helped the economy avoid an even sharper downturn, proving the value of intervention. Opponents say the Fed is partly responsible for setting up an untenable fiscal situation for the U.S., one that must be addressed, lest the nation face an economic crisis.
(On Breakout, Jeff Macke says the Fed won't roll out another QE. Or at the very least, it shouldn't, he argues.)
Of Like Mind
Setting aside the merits, or lack thereof, of further QE , the economists speaking at the NYU forum appear to be broadly in line with what many other market watchers are counting on from Ben Bernanke and the rest of the FOMC in the days ahead.
For instance, Bloomberg ran a report Tuesday quoting Michael Feroli, chief U.S. economist at JPMorgan Chase, as saying he believes the Fed will extend its no-rate-hike promise and detail another QE. Similarly, Pimco's Bill Gross said in a recent Bloomberg radio interview that he's looking for open-ended Treasury and mortgages buys and a pushed-out date for low rates. Currently, the Fed has said it would keep rates at "exceptionally low levels" -- now 0% to 0.25% -- through late 2014 at least.
Glenn Hubbard, dean of the Columbia Business School and an adviser to Republican presidential candidate Mitt Romney, said on The Daily Ticker that he too is expecting a move from the Fed. That said, he doesn't think it will have a "material effect" on the economy. The real problem, he says, centers on areas the Fed can't do a lot to help -- poor business confidence and uncertainty about Washington policy among them.
What's your take? Is QE3 coming? Should it be?