All eyes and ears are on the Fed today and tomorrow as the Federal Open Market Committee (FOMC) meets to contemplate whether the US economy is in dire enough straits to warrant a third quantitative easing.
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Two-thirds of analysts surveyed predict an open-ended QE3 as well as an extension of the low interest rate policy into 2015 from its current target of 2014.
The Fed reportedly feels it is almost immoral for the unemployment rate to be above 8%, especially since it has been above 8% for 43 consecutive months.
Two quantitative easings totaling $2.3 trillion have so far failed to accomplish the task of stimulating the economy enough to bring the unemployment rate down. Does that mean a third time would be charm?
Not necessarily. The fact that a third easing is being considered is already unconventional and the Fed has been weighing other options to jumpstart the recovery.
Speculation is that a QE3 would consist of a mix of Treasuries and mortgage-backed securities added to the Fed’s portfolio. An open-ended monthly asset-buying program of $30 billion worth of government debt and $35 billion of housing debt is the estimated consistency by analysts of the form the easing would take.
Of course, there’s still the chance the Fed would continue it’s wait-and-see stance. But there’s been so much buildup of expectation that the Fed will indeed act
that markets have surged in anticipation. If the Fed then doesn’t do anything, that could be a letdown for investors.
The markets could retreat a bit no matter what happens at the announcement scheduled for 2:15 tomorrow. A simple case of sell-on-the-news could put a slight damper on the markets’ advance. That damper, however, would likely be less than the disappointment of no action.