by Michael Tarsala
Could the stock market be setting itself up for disappointment in anticipating a QE3 announcement this week?
The European debt crisis threatens, and the U.S. job market is certainly not getting any better. That’s why Jan Hatzius, Goldman’s chief economist thinks that more Fed easing is both necessary and likely.
“We believe that an extension of Operation Twist could well be insufficient on its own and could thus be followed by additional easing action before long,” Hatzius wrote in a report cited by Moneynews.
For her part, #2 Fed official Janet Yellen seems to be in favor of more easing.
Yet here’s what former Fed governor Robert Heller had to say on the subject this morning, on CNBC Asia:
“There are many people on the board, and especially on the FOMC (Federal Open Market Committee), the bank presidents, I think are very reluctant to ease,” he said.
“And I don’t see the need for easing either, because the money supply in the United States is growing very satisfactorily, very stable 6, 6.5 percent range. And the Fed has to let that work.
The Federal Reserve cannot continue to “essentially finance half the federal deficit.”
There’s plenty of credit, Heller added. What the U.S. needs is more credit-worthy borrowers. And that’s a problem solved by paying down consumer debt over time — not by more stimulus.
Also of note, Mike Arold, manager of the Technical Swing model, sees one of his favorite risk-on market signals switching to risk-off, and sees a potential market pullback, starting perhaps with small-cap stocks.
Put the pieces together, and it suggests there may be a letdown if all we get this week is an extension of Operation Twist, without an official QE3.
Also, read this story that details how several Covestor managers are planning around a potential QE3 announcement.
