Goldman analyst says QE3 is possible, but will it fly?
While no one has proclaimed that a third round of quantitative easing is a sure thing, a Goldman Sachs (GS) analyst fired the first shot Wednesday, saying the Fed's dovish stance at the Federal Open Market Committee Meeting suggests QE3 is possible later in the year or in early 2012. "We have changed our call because (Tuesday's) statement suggests that the committee's reaction function to incoming economic news is more dovish than we had previously thought," analyst Jan Hatzius with Goldman said. The Fed said Tuesday it would keep interest rates low at least through 2013. "This would probably mean more QE if their forecast converged to our own modal view of a flat-to-higher unemployment rate through the end of 2012, let alone our downside risk case of a renewed recession," Hatzius said. Hatzius said keeping rates low for longer than a year is more aggressive than what analysts expected. The form this third round would take is likely to be traditional quantitative easing. Other options are rate caps — in which the Fed promises to buy as many securities as needed to hit a longer-term target — a price level or nominal gross domestic product target — or interventions in nongovernment securities markets (which would need congressional funding), Hatzius wrote. "Of these, conventional QE is very likely the option with the lowest hurdle and the first to be deployed," Hatzius concluded. "This means that they are unlikely to consist of small incremental steps such as a commitment to keep the balance sheet large, a gradual shift of the securities portfolio into longer maturities, or a cut in the interest rate on excess reserves from 25 basis points to zero." Hatzius noted there are still barriers to QE3 — namely a situation where the economy turns out to be in better shape than expected, inflation and anti-Fed backlash over QE2 and the possibility of further stimulus. She even noted there is dissent among voting committee members, but added "there is no question that Bernanke will always have enough votes, and we fully expect him to use these votes to provide further support to the economy if he views it as necessary." Other analysts view stimulus as the wrong way to go with housing still struggling. "The Financial Stability Oversight Council has to push the banking system to clean up legacy issues before embarking on a substantial amount of further stimulus," said Manal Mehta, a partner with hedge fund manager Branch Hill Capital. Christopher Whalen with Institutional Risk Analytics had a similar reaction. "The key issue is housing," he said. "The housing market has been the chief conduit for monetary policy since WWII. If the banks and GSEs don't allow mortgage refinancing, then there is no monetary stimulus." Write to: Kerri Panchuk.