Enis’s Macro Wrap – Fed’s Actions Speak Louder than Words

by Enis June 22, 2012 7:37 am • Commentary

Dan, CC, and I still think QE3 is no guarantee this year.  We mentioned in QuickHits during Bernanke’s conference call why we thought that was the case, but I want to recap those thoughts here.  Because every data point will be followed by commentary about QE or no QE.  And each tick in the market too.

Bernanke did say, “We are prepared to do more.”  But the most significant statement I heard form him was, “Today we took a substantive step.”  Designating the extension of Operation Twist as a substantive step implies that it was some sort of drastic change in policy.

However, in 2010, when the Fed decided to reinvest proceeds from their MBS purchases, which was an incremental step, Bernanke called it a “continuation” of current monetary policy.  I interpreted those words to mean that more action would be forthcoming, and sure enough, QE2 was announced less than a month later.

Bernanke on Wednesday could have called the extension of Operation Twist a “continuation” of current policy.  Yet, he called it a “substantive step.”  I think his subsequent commentary about “willingness and ability to do more” was designed to appease the doves on his committee.

The committee seems more split than usual.  St. Louis Fed President James Bullard said this morning that “QE3 has a pretty high hurdle.”  Remember, Bullard was an early advocate of QE2 in the summer of 2010.  Today, he sounds opposed to it.

Actions speak louder than words.  Bernanke said that the Fed is prepared to do more.  At the end of the day though, their actions did not do more.  Bernanke seems to reside in Bullard’s camp, that QE3 has a pretty high hurdle.  As a result, we don’t view QE as likely until the market gets to at least negative on the year (below 1250).  Then all the commentary might have some meat behind it.