Let the QE4 countdown begin!

September 25, 2012
September 25, 2012

QE3 already seems quaint.

The third round of the US Federal Reserve’s policy of creating new money and using it to buy bonds — a process known as quantitative easing — was just announced  on Sept. 13 and it’s already getting overtaken by fresh expectations that it will be upsized. Check out some of these comments from Wall Street:

“QE3 will likely be insufficient to significantly boost equity markets and we wouldn’t be at all surprised to see the Fed dramatically augment this program (i.e., QE4) before year-end, particularly if economic and corporate news continue to deteriorate as they have over the past few weeks.” -Morgan Stanley stock market analysts wrote Sept. 24.

“Unless there is a material improvement in the labor data through yearend, we are likely to see a transition from Operation Twist into a Treasury-focused QE4 in 2013 (which will coincide with continued [mortgage-backed securities] purchases via QE3).” -Deutsche Bank economists wrote Sept. 18.

“QE4 speculation has already begun and we are sympathetic to the argument that if the data does not improve by year-end that rather than letting Operation Twist wind down in January, the Fed will continue on with the $45 bn a month of Treasury purchases – cease the sales (as they will have exhausted their short-term holdings) and leave the program open-ended, similar to the MBS buying. We’ll offer the significant caveat that this is not a foregone conclusion, but likely if the labor market continues to muddle along at the current levels and unemployment remains stubbornly high.” -CRT Capital bond market analysts wrote Sept. 25.

San Francisco Fed President John Williams also suggested in a speech Sept. 24 that the central bank “might even expand our purchases to include other assets” beyond the government-backed mortgage bonds and US Treasuries that it has bought in previous QE episodes.

In fairness, there seems to be some dispute over exactly what any next bond-buying program should actually be called. That’s because the current program of buying $40 billion a month in mortgage-backed securities — the packages home loans where almost all US mortgages eventually end up — doesn’t actually have an explicit endpoint. The Fed has committed to keep it going until it sees the improvement it wants in the US job market. Thus the moniker it earned from some market smart-alecks: QEternity.

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