Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Based on some of the “action” and commentary in the past few days, it appears many believe the Fed is potentially stepping away from the monetary easing parade based on comments from the last FOMC meeting. I don’t believe that, nor does Goldman’s top economist honcho, Jan Hatzius.
“It has definitely become a closer call, but we still expect another asset purchase program that involves purchases of both mortgage-backed securities and Treasurys,” he said.
Below he outlines the 3 reasons he expects the Fed to announce an easing in April or June, I particular want to highlight the last one i.e. no continued easing = tightening! since the market has priced in further easing.
Also note Hatzius highlights the potential impact of warmer weather (which many have noted) and seasonal adjustment distortions. If you have not read the piece from December on this, it is important to note – it gets very little play in the financial media but we’ve seen spikes up in economic activity in Q4’s and Q1’s and down in Q2’s and Q3’s (which lead to more monetary easing!). Hence the government economic data, if it follows the pattern of the past few years should begin to weaken in April-June if for nothing else than the distortions 2008-2009 have had on traditional seasonal adjustments.
On to Hatzius:
1. The improvement might not last.
With real GDP growth tracking just 2% in the first quarter and signs that at least some of the recent strength is probably due to the unusual warm weather and perhaps some seasonal adjustment distortions, question marks still surround the true pace of activity growth. In addition, there are still several actual or potential “headwinds” for growth, including a reduced boost from inventory accumulation, the recent increase in oil and gasoline prices, continued risks from the crisis in Europe, and the specter of fiscal retrenchment after the presidential election.
2. Even if the improvement does last, faster growth would be desirable to push down the unemployment rate more quickly.
Fed officials believe that the level of economic activity and employment is still far below potential. This means a large number of individuals are involuntarily unemployed, which not only causes hardship in the near term but may also translate into higher structural unemployment in the long term…This creates an incentive to find policies that speed up the return to full employment.
3. Not easing might be equivalent to tightening.
At a minimum, the bond market currently discounts some probability of QE3. This has kept financial conditions easier than they otherwise would have been, which has presumably supported economic activity. A decision not to ratify expectations of QE3 could therefore result in a tightening of financial conditions.
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