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FOMC Preview: QE4 or Operation Twist 2?

Before the fiscal fully dominates the news towards the end of the year, the Fed meets to make its decision on December 12th. The previous meeting was held after the decision on QE3 and just before the elections, turning it into a complete non-event. In addition, there was no press conference.

This time it will be totally different.

* This article is part of the December monthly forex report. You can download the full report by joining the newsletter in the form below.

Assuming there is no instant deal regarding the fiscal cliff, we can expect more action from the Fed now that the elections are over. The FOMC is likely to introduce more monetary stimulus as the extension of Operation Twist nears its end.

This could take a form of more outright monthly purchases of Treasuries (QE4 or QE-Infinity 2) in a scale of $30-40 billion per month, in addition to the current program of purchasing MBS at the scale of $40 billion per month (QE3 or QE Infinity). Operation Twist will likely be retired.

Some members would probably prefer more twist, but the program already ran its course, was extended, and is now reaching its end. Lowering rates at all levels, without a limit neither in the amount of money nor in the amount of time has higher chances now, as recent comments have shown.

Fed Sees the Empty Half of the Glass

The current dovish composition of the Fed can easily find negative signs concerning the US economy, and can ignore the positive signs. Here are a few examples:

  • Weak manufacturing: Manufacturing sector remains weak, despite talks of “re-shoring” – bringing home industry that was previously “off-shored” to emerging markets.
  • GDP for Q3 was revised to the upside, 2.7% (annualized), yet the components of this growth are certainly worrying. Here are 4 reasons to be worried about US growth.
  • Unemployment: Officials are not satisfied with the employment situation: the participation rate is still low, and the unemployment rate including discouraged workers remains high, despite some improvements in the report for October. One good report is certainly not enough, and November’s report will likely be mixed, even if it is only due to “Sandy”. And, the recent report, which was OK, is probably not impressing enough for Bernanke.
  • Housing: This is the strongest sector of the economy, but not all the indicators are perfect: while prices are rising, pending home sales are rising and building permits are on the move as well, the recent new home sales figure disappointed. With the dovish view of the Fed, this is enough to show that housing is still weak, and that it needs more support, in order to create a wealth effect – more spending.

Critics say that when the Fed talks about the wealth effect regarding the housing market and the stock market, it is actually thinking only about Wall Street, but that is a different argument.

While the impact of more monetary easing at this point is questionable, the Fed would probably prefer to do something when it has a chance. The end of Operation Twist provides a chance.

Guidance Likely to Remain Unchanged

A change in the forward guidance has little chances now, as not enough time has passed since the previous decision to extend the guidance regarding low rates until mid-2015. This will probably wait for the next meeting, which will already be voted by the new FOMC composition.

Fed officials have discussed tying the guidance regarding low rates to economic parameters such as inflation and unemployment, and some have even suggested a few numbers, such as low rates until unemployment falls below 7% and as long as inflation is under 3%. It seems that each participant has his own numbers.

An introduction of economic indicators instead of some distant date in the future would certainly be refreshing and would add some more long term certainty. However, the different views and the short time that passed since the recent extension (just two meeting ago, in September), gives this option low probability.


The impact on the dollar could be negative at first. Afterwards, we could see a “buy the rumor, sell the fact” reaction.

Further reading:  US recession already in play? One lone voice continues insisting

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.