Fed’s “Low for Longer” Pledge Lowers QE3 Bar

Posted February 16, 2012 by Editor

[private]

• The Fed decided last month to extend the “exceptionally low” for longer pledge from mid-2013 to the end of 2014.
• But low does not mean unchanged.  By the end of 2014, a majority of members think policy rates will be higher, with five thinking rates could be higher than 2 percent.
• Three years is a long time and the pledge is conditional on economic performance.  While the bar is higher for QE3 than QE2 (employment and core inflation are now rising), the Fed’s bias is to ease further should growth fade below 2%. 
• Before QE3 were to be adopted, however, the Fed might adopt a compromise QE 2.75, in which the balance sheet is not expanded but the composition changes in favor of mortgages (to do “something” for housing).
• In any event, investors will front run potential changes.  If the last 2004 tightening cycle is any guide, the 2-year Treasury note might exceed 150 bps before the Fed finally pulls the trigger. 

fed_low_for_long_021412[/private]