Bloomberg estimates the markets have priced in a third bite at the quantitative apple of about $500 bln in fresh Treasury buying from the Fed, to be hinted at this Friday by Bernanke in Jackson Hole.
I think the market is way ahead of itself. We’ve seen Bernanke layout multiple options other than QE and he used one of those at the last FOMC meeting (sparking vigorous dissent within the FOMC).
QE3 has become a target on the campaign trail and of late-night comics. Conventional wisdom is that it produces no jobs but sparks sustained rises in food and energy prices. Bernanke may be an egg-head MIT-trained economist, but he ain’t deaf. My guess is he will try some of the other options outlined in his economic update to Congress in July before he opts for a third go at quantitative ease.
So we will wait all week for a speech that will likely only disappoint the equity and bond bulls. Could be ugly, but risk aversion tends to support the buck…
What do I expect? Perhaps he will try a sort of QE-lite, selling shorter-date Treasuries while buying longer-dated paper. That could help ensure the present low-rates at the long-end stick around a while but keep the Fed’s balance sheet unchanged.
