The Fed considering an upsized QEE

From Marketwatch....

While it may not sound like much, the Fed may buy over $1 trillion in MBS based on current forecasts, analysts at Capital Economics estimate. 

The Fed also took the dramatic step of saying it expects to keep short-term interest rates unchanged even if the recovery strengthens. It also pushed out the calendar date for the expected first rate hike until mid-2015. 

There are no pressures on the Fed for immediate action on these two fronts, economists said.

“I think they are reasonably comfortable with the market reaction [to QE3] and the way the economy has turned out,” said Michael Hanson, an economist with Bank of America Merrill Lynch. 

Robert DiClemente, chief U.S. economist at Citigroup, noted that, in the wake of QE3, Citi’s financial-conditions index has reached its most accommodative reading since the Fed began easing more than five years ago. “At its current reading, the financial-conditions index is consistent with above-trend growth in final demand, an important prerequisite for stronger hiring and meeting policy goals,” DiClemente wrote in a note.

U.S. Treasury prices drifted lower Monday as traders waited to see if the Fed changes the forward guidance. 

“The Fed has entered a holding pattern while watching for signs of a substantial improvement in the labor market,” added Ellen Zentner, senior U.S. economist for Nomura Securities. 

At the moment, the Fed is buying $45 billion of long-term Treasurys each month under its Operation Twist program, with the purchases offset by sales of shorter-term securities. Many economists think the Fed will decide to expand QE3 by that amount, and with Treasurys instead of MBS. But the announcement is not expected to come until its December meeting. 

Several Fed officials have spoken in favor of expanding QE3.

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Really? QEE is not even two months old and the Fed officials are already talking about expanding it. The thing is, as long as inflation and monetary velocity remain low we will probably continue to hear more talk about expanding QEE. What is likely to stop the expansion? One guess is that that lose control of interest rates (and they rise) and the desire to hold cash diminishes.