Feds To End Quantitative Easing (QE) By 2013?

Hawkish Federal Reserve Officials Calling For The End Of Quantitative Easing In 2013

(US) Fed’s Plosser (hawk, non-voter): Forecasts GDP in 2013 and 2014 at 3% 

  • Sees unemployment at 6.8-7.0% by the end of 2013
  • Fed should stop bond purchases before thresholds are reached and the Fed raises interest rate
  • Unclear what the Fed will do when inflation reaches 2.5% and unemployment at 6.5%; there is a fear people may become too focused on the thresholds
  • There is evidence that US GDP growth potential has declined, so output gap is smaller, which has consequences for monetary policy.
  • The timing of the end of Quantitative Easing will be a “qualitative judgement,” judgement will be based on the condition of labor markets.
  • Unemployment rate will make substantial progress in 2013.

(US) Fed’s Lacker: Fed’s real goal for inflation is 2%, markets do sometimes overshoot and that could be a possibility in the long term debt market 

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  • May need to withdraw stimulus before unemployment reaches the 6.5% threshold
  • Growing balance sheet will complicate exit from stimulus, FOMC must act before inflation emerges
  • Monetary policy is best applied in a systematic and rule based manner
  • Expects inflation to average just below 2% in 2013, inflation expectations suggest continued stability
  • The larger the Fed balance sheet gets, the more vulnerable it becomes.
  • Disappointing growth may be the best that can be expected.
  • US households are more cautious in spending habits, to be more confident a year from now
  • Prospects for longer-term US growth are quite strong.

(US) Fed’s Bullard (hawkish, FOMC voter in 2013): Employment report shows its ‘steady as she goes’; economy growing at 2% or slightly more 

  • May see improvement in the jobs numbers later this year; could be close to 7.1% by the end of 2013.
  • Quantitative Easing being conducted now is technically easier policy than was being conducted under the prior ‘Twist’ program.
  • Supportive of new ‘threshold’ policy vs calendar based policy.
  • Believes its clear Fed will pull back on QE as unemployment declines, and before it starts raising rates (when unemployment gets around the 6.5% target threshold).
  • Debt ceiling is a ‘dangerous thing to fight over.’

How to interpret these headlines?

With all three Fed officials calling for the potential end of Quantitative Easing (QE3 and QE4) and the fact that Bernanke and other doves have not responded, it is increasingly likely that the market may be repositioning itself for a USD breakout.  Although the reality may be different from market perception, I do believe that because of this “unexpected twist of events”, USD will continue to remain in demand, until there are reasons (such as other Fed Officials comments) for the market to act otherwise.

Of course, judging from the intensity of sell offs in European currencies, we are likely to see some consolidations; but facts remain unchanged that if the Feds were to end QE this year, the next step would be to raise interest rate, and that would come as early as 2014, or a whole 12 ~ 16 months earlier than the previous FOMC Statement (the statement before the Committee changed to threshholds based targets), where the Committee was still calling for “exceptionally low rates until mid 2015″.

This may very well be another “turning point” in the Forex market, I’d definitely recommend to use caution when selling USD, as the trend may have changed.  My recommendation is to SELL JPY, CHF, and CAD against USD, as the outlook for EUR, GBP, AUD, and NZD may be affected by risk sentiments and/or central bank actions.

 

Thanks,

henry sig Feds To End Quantitative Easing (QE) By 2013?

 

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Avatar of Henry Liu About Henry Liu

My name is Henry Liu and I am a Forex Trader and Mentor. I help traders achieve consistent income trading Forex while spending less time trading. My focus in trading is a combination of Fundamental Analysis, Technical Analysis, and Market Sentiment. Far too many retail Forex traders concentrate on just one aspect of trading, technical analysis, and ignore everything else; it is my goal (and vision) to educate every trader on how to take advantage of news trading and become more balanced traders.

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