Tuesday, September 28, 2010

Marching Toward More QE

What started as a hint in Bernanke's Jackson Hole speech a few weeks ago and was seconded by a more overt hint to that effect in the latest FOMC statement, seems to have taken the form, in the Treasury market's mind, of an almost unstoppable march toward more quantitative easing by the Fed. Today's front page article in The Wall Street Journal, along with the sharp decline in the Conference Board's consumer confidence index for September, seemed to have added an air of a near inevitability to the prospect of additional purchases of Treasuries by the Fed in the foreseeable future.

The obvious question that this dynamic generates is whether there is anything, at this point, that can derail this outcome.

With the various economic reports in recent days having failed to provide any glimmer of hope that economic activity is gearing up, the possible "cicrcuit-breakers" are dwindling fast. With Friday's ISM likely to show, if anything, a modest retreat from its 56.7 level in August, the only potential piece of economic data that would allow the Fed to take a step back and wait a little longer, appears to be the September employment report. While putting forward hard and fast rules here as to what nonfarm payroll number would be required to put the Fed's apparent plans on hold is a tricky task, it is not unreasonable to argue that a gain in private payrolls by more than 125K in September (to be released on October 8) might give the Fed some room to take a small step back. (Such a reference number is not outlandish, as just in July- in the midst of the current soft patch- private payrolls turned out a gain of 107K). Then, the behavior of the September core CPI could take an unexpectedly pivotal role in the final decision. With the core index currently running at 0.9% year-on-year, a gain of 0.2% in the series for the month could help expand the Fed's breathing space- at least for a while.

Anthony Karydakis

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