On April 24, the Fed left interest rates, the size of its asset purchase facility, and the expiration date of Operation Twist (due in June) unchanged in its most recent FOMC statement. Meanwhile, improvements in the economy warranted upward revisions to the central bank’s growth forecasts.
Fed Chairman Ben Bernanke said he and his band of bankers expect the economy to expand moderately and “pick up gradually.” However, he hinted that they are prepared to do whatever is necessary to sustain the economic recovery.
Everyone pretty much took that to mean that more stimulus could still be on the horizon for the U.S. However, the minutes of the meeting revealed that the Fed may be closer to pulling the trigger on QE3 than we had previously thought!
The latest FOMC meeting minutes cited that several members feel that additional easing measures could be implemented if the recovery loses momentum or if signs that would warrant downward revisions to the bank’s forecasts materialize.
And to think, just a month before, only a couple members indicated a need for more stimulus! To go from “a couple” to “several” is a big deal yo!
Of course, with the recent string of not-so-impressive economic reports, a lot of market junkies are starting to worry about QE3 happening sooner than later.
For one, labor market conditions are dreary. The most recent NFP report disappointed when it came in at 115,000 versus the 170,000 forecast.
Sure, the unemployment rate trickled down from 8.2% to 8.1% in April, but it wasn’t because there are really fewer jobless people. Rather, it’s mainly because people have given up job-hunting and dropped out of the work force.
In April, we also saw growth in the non-manufacturing sector slow for the second month in a row.
The ISM non-manufacturing report came in at 53.5 following March’s 56.3 reading. I don’t know about you, but that sounds like the textbook definition of momentum loss to me!
Meanwhile, the retail sales report for April also printed grim figures, posting a measly 0.1% growth for both the headline and core readings.
And then there’s the inflation situation.
Recall that back in March, a couple FOMC members said that they’d consider more stimulus “if inflation seemed likely to remain below its mandate-consistent rate of 2% over the medium run.” However, in the April meeting minutes, the Committee already indicated that it expects inflation to run at or below its 2% target down the line!
Hmm… Is the FOMC trying to tell us something here? Is this its way of hinting at QE3?
What’s clear is that recent CPI stats show that inflation has been softening up. Consumer prices were flat month-on-month in April, which translates to a 2.3% year-on-year increase in consumer prices. For those of you keeping track, this is the smallest gain since February 2011!
Overall, the market’s reaction to the FOMC meeting minutes has been a bit limited so far. But the way I see it, if the Fed keeps this kind of talk going (or adopts an even more dovish tone), it might serve as a catalyst to undo the dollar’s recent gains.