QE2 Update – Expectations Narrowing Down

The QE2 decision is getting closer – at 18:15, the FOMC will release its long awaited decision about a second dollar printing program. Here are the latest estimations. The narrow estimations leave more room for a surprise and high volatility.

Out of the 5 scenarios for the quantitative easing decision, scenario no.2 is now popular with economists – a gradual program to buy about $85 billion of US treasury bonds every month, for six month, making the total program worth $500 billion.

Another option, discussed here, is buying $100 for 5 months. The end result is similar – $500 billion of fresh cash pumped into the economy.

As it seems now, the high expectations for a huge program (even 4 trillion was thrown in the air), will probably result in a disappointing, more moderate plan. After the dollar fell for two months, and recently stabilized, it could turn around.

Peter Anderson sees a rather “lite” program, but says that the short-covering in such a case might not be as big as expected, on a “buy the rumor, sell the fact” scenario. John J. Hardy is pessimistic about the results of the QE program, and sees it as a danger to the US economy.

So, if the Fed announces a program larger than $500 billion, it will be dollar negative, and if the program is smaller, this is dollar positive. But what if they don’t lay out a number?

What if they just say that they’ll act “as needed” or some other mysterious wording? Some analysts see it as dollar positive – with no number as a good sign of caution. Others see it as an open door for unlimited printing.

One sure thing is  high volatility for many hours after the event. We’ve already seen an initial, rather mild reaction in one direction at first, and a big turnaround on the day after an FOMC statement. The surprise won’t be as big as in March 2009, when Bernanke caught the markets in surprise and sent EUR/USD up 600 pips.

Here’s more about the quantitative easing and possible scenarios for the dollar.

Let’s have a musical pause. Via Mish, I found this song about the QE – it was written by Merle Hazard and  Curtis Threadneedle, which sings this 70s style soulful song.

Will we also get 70s  style  inflation after this decision?

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