QE2 Lite Kick-Off? FOMC Preview

QE2 Lite Kick-Off? FOMC Preview

The FOMC is unlikely to announce a third program of quantitative easing, but will probably kick off the buying of maturing assets. This QE2 Lite program will likely be received positively by the dollar, but this also heavily depends on the words and the tone of Bernanke in the press conference . FOMC Preview with the two most important scenarios.

Statement released on Wednesday at 16:30 GMT, press conference begins at 18:15.

The current QE2 program, announced in November, is about to end very soon – on June 30th. The big question is: what happens next? In the previous FOMC meetings in April, Bernanke faced the press for the first time, and hinted about the next steps .

He then said that no QE3 program is planned, despite the weakness of the US economy. But, he also said that the Federal Reserve will reinvest maturing assets, keeping the current balance of the Federal Reserve. In an answer to a question, Bernanke said that stopping of such investments mean a new policy of tightening, that requires a separate decision, that will be separately announced if made.

This is a repeat of the QE-Lite program that followed the end of the original huge QE program. It was then followed by QE2.

Weak economy, cheaper oil

Since that meeting, the US economy has further deteriorated. This was seen not only in the weak growth in Q1, which Bernanke acknowledged at that meeting, but also in other figures. Non-Farm Payrolls rose by only 54K in May. The Philly Fed Manufacturing Index has dropped to negative territory once again. Also the services sector has slowed down significantly. Everything points to weakness.

Since that meeting, the price of oil also fell by almost 20%. This was in anticipation for the end of QE2, but also due to Trichet’s softer stance on inflation and the reduced importance of Middle-East worries.

What will Bernanke say?

These developments can open the door for QE3 – with less inflationary risks and with a slowing economy, perhaps more stimulus is needed. The chances are slim. It’s not because QE2 failed. It is because Bernanke usually takes the time by setting the ground for such a move.

So, as it happened last year, the Federal Reserve will move to QE2-Lite. If the economy continues to be sluggish, QE3 will be considered.

Here are two probably scenarios for his words at the press conference:

  1. No Hints on Future Moves: If Bernanke only says that QE2-Lite will be kicked off and that the FOMC will continue monitoring the situation, the dollar will rise. While this is expected, it is still a shift of policy – from extending the balance sheet to maintaining it at the same level. This will strengthen the dollar, but at a limited rate against the other “safe” currencies – the yen and the franc.
  2. Open Door for QE3: If Bernanke announces QE2-Lite and says that another program is possible, even if only next year or only in distant theory, the dollar is likely to fall. Up to now, this option was off the table. Putting it back may hurt the dollar, and trigger risk rallies, boosting the euro and the Aussie.

The option of a rate hike – a change in the Federal Funds Rate, is of course extremely unlikely. Also an announcement of QE3 now (very dollar negative) or a decision not to invest maturing assets (dollar positive) is very unlikely.

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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.