Chill out, folks! You won’t have to wait much longer. We’ll finally find out if the Fed will push through with QE3 in its FOMC statement tomorrow!
But before you go nuts and start entering trades left and right, do yourself and your account a favor by reading up on what you can expect from this high-caliber event.
What do the markets expect from the Fed?
Recent economic reports and statements from Fed members have led economic nerds worldwide to expect some sort of easing tomorrow. It’s possible that the Fed could extend its period of accommodatingly low interest rates to mid or late 2015.
Many also think that the central bank may decide to roll out a new purchase program (a.k.a. QE3) that will differ from other stimulus packages in that it could be open-ended. In other words, rather than having a fixed and stiff structure, the Fed may decide to continue or stop purchases every time it meets, depending on economic conditions.
What’s keeping the QE3 vibe alive?
Some of you may be wondering why the markets are expecting QE3 in the first place. Well, if we’re gonna point fingers, I’d point mine at the Fed, which has been laying the groundwork for more quantitative easing for months now, most recently in Jackson Hole.
In addition, the surprisingly ugly employment figures we saw in the August non-farm payrolls suggest a need for some sort of economic boost. Keep in mind that one of the Fed’s objectives in conducting monetary policy is to achieve maximum employment.
What could keep the Fed from announcing QE3 tomorrow?
If the Fed decides to pull the trigger with QE3 now, it runs the risk of running out of ammo later on. What if the economy doesn’t respond to it? QE3 now could easily result in QE4 next year, which could lead to asset bubbles and hyperinflation.
Besides, the other employment reports in August didn’t paint as grim a picture as the NFP did. The ISM services PMI, another good barometer for employment activity in the U.S., printed at 53.7 when analysts were only expecting a reading of 52.5. Heck, even the ADP report blasted expectations with a 201,000 number last week. Sure, it’s nothing to brag about, but it’s not that bad either.
Naysayers of QE3 also point out that the Fed’s Operation Twist isn’t due until the end of the year. They believe that the central bank will most likely finish its $267 billion program before it launches another stimulus program.
Trading the report
For those who can’t wait to trade the report, here’s a lil’ something for you. Looking at USDX’s daily chart, we can see that out of the last five times that the Fed had met his year, USDX had risen three times. It closed near its open price once and also fell only once this year. This means that in 3 of the last 5 FOMC statements, the Greenback has strengthened against its counterparts.
Before you buy the dollar like there’s no tomorrow though, you should consider other scenarios that could play out. First, we could see a “buy the rumor and sell the news” situation which could boost the dollar against its counterparts.
But if the Fed hints at a conditional QE3 or other stimulus programs in the near future, then we could also see a risk rally that could drag the dollar deeper against its high-yielding counterparts. Last but not the least, the Fed could say nothing and only repeat its promise to do more if necessary. This would be a disappointment to investors and inspire risk aversion in markets.