QE3 May Be In The Offing Near June 2012 FOMC Meeting, But Is It Too Late?
Economic data hasn’t helped market psychology for the last few weeks and Europe has deteriorated quickly along with weakness in China.
U.S. equities have been in free-fall mode and it has brought the “Bernanke put” under the microscope. The Fed is watching economic data carefully related to the U.S. economy but the forecasting may be different than what was predicted early in the year based on external factors that may have been given less weighting last year.
We have lowered our economic outlook based on poor jobs numbers along with accelerated debt crisis issues impacting the U.S. from Europe and China. We don’t believe the risks to the economy are contained and we expect more easing shortly.
If no more easing occurs and European banks don’t add liquidity to help resolve the crisis of confidence, we expect the recent economic gains in jobs to reverse course. Decreased wealth effects will chide already nervous investors from digging deeper into their pockets when fiscal and monetary policy is uncertain.
Time considerations are important for implementing monetary policy and some investors believe it may be too little too late if investors lack confidence in the ability for more easing to have an impact. Expectations are hard to change.
Equities could lose some volatility in the medium run if trader sentiment is shifted by – a needed catalyst from central banks. The S&P 500 hasn’t held up in almost 2 weeks of trading and could be due for a small bounce from oversold conditions since many stocks have become cheap indiscriminately. Prices can always get cheaper but we believe a shift from bonds could be forthcoming medium run. The U.S. dollar will be worth watching for any clues QE3 is in the offing.