Tags: Quantitative | easing | Fed | economy

Goldman Sachs: Market Demand for Fed Stimulus May Drive It Away

Wednesday, 15 August 2012 11:06 AM

Market demand for Federal Reserve stimulus tools has been so great and has sent stocks climbing to the point that the Fed may forgo intervening in the economy after all, said Goldman Sachs' chief U.S. economist Jan Hatzius.

To spur recovery in downturns, the Fed cuts benchmark interest rates, but when such a move falls short, the U.S. central bank resorts to unorthodox policies such as quantitative easing (QE).

Under QE, the Fed buys Treasury holdings and mortgage-backed securities held by banks, pumping the financial system full of liquidity to further drive down interest rates to boost the economy.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

Stock prices rise under such a scenario, and a string of bad economic indicators in recent months ranging from soft gross domestic product rates to high unemployment figures have fueled sentiments the Fed will intervene.

Such speculation has prompted investors to buy stocks in anticipation of a Fed announcement, and prices may have risen to the point that the Fed may forgo or delay intervening, concluding that anticipatory stock buying jolted the economy in much the same manner as intervention itself.

In fact, indicators are already improving.

The U.S. Commerce Department reported that retail sales jumped 0.8 percent in July after a 0.7 percent drop in June.

It was the first gain in four months.

“The U.S. economic data continue to look a bit stronger. Tuesday’s retail sales report for July beat expectations, while inventory accumulation showed a further slowdown in June. Our Q3 GDP tracking estimate edged up to 2.3 percent. The recent news also has implications for Fed policy,” Hatzius wrote in a note, according to Zero Hedge.

“While QE3 at the September 12-13 [Federal Open Market Committee] meeting remains possible, our best estimate is that it will take until late 2012/early 2013 before Fed officials return to balance sheet expansion.”

A decision to roll out QE would be the third since the downturn.

Other experts agree that the Fed has room to wait and see.

“More broadly, we’re starting to get questioned as to whether ‘investors are rallying themselves out of a QE3’ and what effect this might have on the Chairman at Jackson Hole,” said Dan Greenhaus, chief economic strategist at BTIG, referring to the Fed’s annual retreat in Jackson Hole, Wyo., where Fed Chairman Ben Bernanke hinted about stimulus tools in the past, according to Business Insider.

“Let’s remember something very important; equities should be driven higher by improving fundamentals as well as an improving economic backdrop, not central bank accommodation,” Greenhaus said.

“Today’s retail sales number, while only one number, serves to boost expectations and with it stock prices. Secondly, rest assured that Ben Bernanke’s medium term economic forecast has very, very little to do with the performance of the S&P 500 over a given one month time frame.”

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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Wednesday, 15 August 2012 11:06 AM
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