Fed QE3 To Increase To $85B By Year End – Chicago Fed Evans


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(US) Fed’s Evans (FOMC alternate, dove): This was the right time to act, the Fed QE3 is making modest, safe policy moves.

  • Timid policy moves would only prolong economic problems. Without Fed stimulus, the economy would be worse.
  • Fears of Fed-fueled inflation are consistently wrong.
  • US economy faces significant risk the global economy will weaken, plus risks from the crisis in Europe and the fiscal cliff.
  • The economy faces a demand problem, not a structural problem.

(US) Fed’s Evans: Fed is moving as quickly as it can on the economy; it is a positive that the asset purchases time frame is open ended.

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  • Highlights existing stimulus has built in measures to handle inflation should it arise; 3% medium term inflation expectations would act as a ‘trigger’ to provide less monetary accommodation
  • Congress and the president need to “provide a little help” in solving long-term fiscal problems.
  • Interest on Excess Reserves (IOER) is among the options if Fed purchases are not enough for the economy
  • Interest rate should remain at zero for as long as unemployment rate is above 7% – Not seeing must evidence of ‘too much exuberance’ in the stock market
  • Must focus on targeting strong market incentives to drive US growth.

(US) Fed’s Evans: Sees unemployment rate declining below 7% by the end of 2014, Fed may pare back purchases assuming unemployment nears 7%

  • Sees Fed increasing QE3 to $85B/month if by year end (and subsequent expiry of operation twist) strong employment has not be observed
  • Hard to use any single number to determine what jobs improvement would describe; discussions at the Fed expected to be thorough to determine what exactly jobs improvement would involve.

How to interpret this speech?

Federal Reserve Bank Of Chicago President Charles Evans delivered a speech today titled “Perspectives on Current Economic Issues” at the Bank of Ann Arbor in MI, in which he expressed his support on recent Fed QE3 announcement.  Evans is a long-time dove, who consistently called for a target based monetary policy, and it is no surprise that he supports QE3.  In the Q&A sessions that followed the speech, Evans talked about that he sees the Federal Reserve increases the size of MBS purchases per month to $85 billion by year end after Operation Twists end, maintaining the same purchase amount but focusing on different sectors… This is a positive comment for the market knowing that the Fed will keep printing money until they run out of ink or economy improves, whichever comes first.

The comments on inflation, 3% medium term inflation expectation would act as a ‘trigger’ to provide less monetary accommodation’  once again confirms my view that the DUAL MANDATE is out of the window for the time being.  We are currently at 1.9% Core CPI and 1.7% CPI; it means they are willing to tolerate at least 1.0% increase in inflation before they cut down  on printing, but note he did not say stop printing.  So the moral of the story is:  SELL USD.

Mark this day on your calendar and come back to revisit by the end of November, you’ll be surprised to see how much USD has dropped across the board.  I’ll be looking to SELL USD, or go LONG on EURUSD.



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