NEW YORK (TheStreet) -- Those holding out for QE3 next month may be disappointed but such is the trade-off when the economic data improves.
On the heels of July's decent jobs report and the retail sales rebound along with other promising data points, the case for urgency when it comes to more accommodation from the Federal Reserve takes a hit.
"[I]n contrast to a number of other forecasters, we do not expect a move to QE3 at the September 12-13 FOMC meeting," wrote Jan Hatzius, chief U.S. economist at Goldman Sachs. "Although Fed officials clearly adopted a strong easing bias at the July 31-August 1 FOMC meeting, we do not think that this amounts to a pre-commitment to QE3. Instead, we believe that continued weakness is necessary to prompt a substantial easing move. And so far, that weakness is not showing up in the data."
Hatzius now expects Ben Bernanke & Co. won't sign off on expanding the central bank's balance sheet until late 2012/early 2013."To be clear, our own view remains that there is a very solid case for additional accommodation under the Fed's dual mandate of maximum employment and 2% inflation," he said. "And we do believe that Fed officials will ultimately decide to ease policy further." Hatzius also said other factors aside from the economic data have recently "swung against the expectation of aggressive near-term easing." "The inflation outlook has become a bit cloudier in the wake of the recent recovery in commodity prices; while Tuesday's upside surprise on producer prices was largely driven by volatile sectors such as vehicles and tobacco, underlying price pressures were also a touch firmer than we had expected," he said. "Moreover, our GS financial conditions index has now fully unwound the tightening seen in the second quarter, and we have found previously that the meeting-by-meeting probability of Fed easing is quite sensitive to financial conditions." The situation could change quickly though, Hatzius acknowledges, especially after the recent chatter from Fed officials about the possibility of a bond-buying program based on certain economic goals being met, rather than being relegated to a set amount, i.e. $600 billion in bond purchases over six months. "To be sure, the uncertainty around the near-term trajectory of Fed policy remains substantial," he said. "Several FOMC meeting participants, specifically Presidents Evans, Rosengren, and Williams, are making the case for additional easing via potentially open-ended balance sheet expansion. And it might well be that Chairman Bernanke will use his speech at the upcoming Jackson Hole Symposium to explain why the Fed's mandate calls for further accommodation in the near term. We will be receptive to these messages and will review our monetary policy forecasts as needed." The rest of 2012 already promises to be eventful on the domestic front with the presidential election and the fiscal cliff ahead but investors buying stocks now on the expectation of QE3 arriving sooner rather than later may be in for a long wait.
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