We noted extreme levels of optimism earlier today. What could possibly trigger a correction in stocks and commodities? If the Fed fails to signal and/or announce another round of quantitative easing (QE), it would undoubtedly leave the markets disappointed.
The Fed uses the Wall Street Journal (WSJ) as a medium to communicate with the markets. It is possible someone at the Fed picked up the phone and said, “We need to temper short-term expectations for another round of QE. Can you help us out?” Friday’s WSJ has an article titled “Fed Holds Off For Now on Bond Buys”. Notice the word “may” is not included. Here is the first paragraph of the article:
Federal Reserve officials are waiting to see how the economy performs before deciding whether to launch another bond-buying program.
The statement above is very direct; it does not contain “expected to” or “analysts believe the Fed will”. While anything can happen next week, the WSJ is always worth monitoring prior to Fed meetings. Below are some more excerpts (WSJ 01/20/2012):
Some Fed officials are open to more bond buying if the economy doesn’t continue to improve, or if inflation falls much below their objective of about 2%, but they believe the outlook is too murky to move now, and views vary on the costs and benefits.
John Williams, president of the San Francisco Fed, for example, said in a recent interview that he would support such purchases if he was sure of his economic forecast for low inflation, but he doesn’t have great confidence in the forecast yet. “And also there are costs to taking greater policy action. There are always trade-offs that have to be weighed,” he added.
Some Fed officials oppose more bond buying, echoing outside critics who charge that it has done little to support the economic recovery and might be breeding inflation.
Right now, with unemployment at 8.5% in December, the Fed is missing the mark on joblessness. Inflation overshot its 2% goal for most of 2011 but shows signs of retreating. Some officials, including Mr. Williams, believe that if inflation falls below 2% and shows signs of staying there, more bond purchases would be justified. But if inflation lingers at or above 2%, or unemployment falls faster than expected, then the case for more bond buying will become harder to make.