Major Players on Wall Street are Sure Another Fed Stimulus Looms

Tuesday, 11 September 2012
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Published in United States Economy

For several months now investors in America have debated whether or not the Feds are ever really going to give another stimulus to the U.S. economy or not. They have flirted with the idea, but continued to stay away from the possibility because the economy is recovering, albeit slowly. Now it seems the big players on Wall Street all seem to agree on one thing; that the Federal Reserve is about to create more money to inject another stimulus into the economy.

After the last Federal Reserve meeting, Fed Chair Ben Bernanke did hint that another stimulus was more than likely coming. While he didn’t give any hard dates, he did make it clear that it would probably need to happen. As I have written time and time again, I still think tat another stimulus would only act as a temporary solution, especially since the Feds will have to print more money to do it. This means inflation, and while it will show positive for a while, especially in precious metals markets, it may not help the overall landscape of the economy in the long run.

First-Strike

That being said, the major players on Wall Street all seem to agree that the Feds are about to print more money and utilize it to buy bonds such as Treasurys or mortgage-backed securities. The Feds may not over-inflate their balance sheet, but it will cost them to do this.

Many supporters of another stimulus (even at the cost of printing more money) look to the recent AIG deal. The Feds bought the company in a bailout maneuver a while back and just finished selling off the shares. This move made the United States economy around $7 billion.

Whatever side of the spectrum you are on, it should be noted that another cash stimulus only has about a 50/50 chance of working properly in the long run. It will look great for the first few months, but eventually the money that was printed (with nothing to back it) will cause some inflation problems. We can’t keep on printing money just to do it, which is what many investors want. However, it could work like the AIG situation if handled properly. We will have to wait and see.

Below you will find comments and quotes from the major players on Wall Street. Here is what they are saying about the likely stimulus.

Goldman Sachs: “We now anticipate that the FOMC will announce a return to unsterilized asset purchases (QE3), mainly agency mortgage-backed securities but potentially including Treasury securities, at its September 12-13 FOMC meeting. We previously forecasted QE3 in December or early 2013. We continue to expect a lengthening of the FOMC’s forward guidance for the first hike in the funds rate from “late 2014” to mid-2015 or beyond … While there is significant uncertainty around the details of any new program, our base case is that QE3 will be formulated as an open-ended asset purchase program of around $50 billion per month, with an end date that is not given in advance but made dependent on progress in the economic recovery.”

Deutsche Bank: “We believe the weak employment data are sufficient to push policymakers to announce a third round of quantitative easing which is likely to be data dependent and hence open-ended. This is in addition to our expectation of strongly worded language that pushes the forward rate guidance out beyond late 2014.”

Barclays: “We think the lack of labor market firming in Q3 12 will lead the Fed to launch QE3 next week. We believe an open-ended program of purchases of Treasuries and agency MBS is likely, with the Fed announcing a flow rate of asset purchases on a monthly or quarterly basis but not putting an overall ceiling on the program. This would emphasize the Fed’s unlimited balance sheet and willingness to do whatever is needed to bring about a more robust labor market recovery. If the FOMC does announce an overall purchase amount, we would expect it to be in the $500bn range, evenly split between Treasuries and agency MBS. In addition, we think the FOMC will extend its low-rate guidance into late 2015 from late 2014.”

Morgan Stanley: “We are out of step with most market observers’ march of complete conviction that the Fed will announce QE3 at the conclusion of its meeting of September 11-12. We do not dispute that the Fed will provide more policy accommodations next week. However, the apparent confidence that the action the Fed takes will be to expand its balance sheet is misplaced.”

J.P. Morgan: “We also believe the Committee will initiate a new round of asset purchases, with agency-MBS constituting some, if not all, of these purchases. The length and magnitude of these purchases is, in our mind, the most uncertain aspect of next week’s meeting. For reasons we explain below, we think they announce $300 billion of purchases concluding at the January meeting, with a stated intention to potentially provide more accommodation then. We believe this will not interfere with or change Operation Twist. We do not see any other actions forthcoming, such as reducing IOER or changing discount window terms.”

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Jeremy Holcombe

Jeremy is a seasoned finance writer who has been studying the gold and silver industry for many years. His vast knowledge in the precious metals sector led him to Goldco Direct, where he is now one of their most recognized writers both on the site and around the web. Along with being a senior Precious Metals writer for Goldco Direct, he is frequently featured on many financial sites on the internet where they tap into his knowledge about gold. Jeremy is passionate about educating investors about the yellow metal as its price continues to rise to record breaking levels.