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Thursday, October 28, 2010

**[investwise]** Markets will fly higher if this happens

 

(Article extract from today's ET)
 

Fed all set to ease policy further


OPINION IS DIVIDED ON THE QUANTUM OF STIMULUS

Pedro Nicolaci da Costa WASHINGTON


THE Federal Reserve looks set to embark on a hotly-debated second round of monetary easing next week, but much uncertainty surrounds the scope and pace of bond purchases by the US central bank. 
Market expectations have centred around an initial commitment to buy at least $500 billion in Treasury debt over five months in an effort to spur lending and support an economic recovery that is too weak to tame high unemployment. Further muddying the outlook, Fed officials have offered conflicting signals on their policy predilections in recent weeks, with some pushing for a very aggressive stimulus and others highly sceptical of any additional accommodation. This makes it harder to gauge where the ultimate consensus will settle, though most analysts assume Fed Chairman Ben Bernanke's dovish leanings will carry the day. 
 
Here are some ways in which next week's decision might play out:
   
$500 BILLION OVER FIVE MONTHS, HINTS OF MORE:

This is
the base-case scenario for financial markets — investors may have already priced in even more, in fact. However, any disappointment at the headline figure would likely to be more than offset by any nod to the possibility of further purchases.
   
$750 BILLION TO $1 TRILLION, HINTS OF MORE:

The Bernanke Fed has shown a propensity for erring on the
side of going big. This is based on the notion that policy acts with a lag, and that fighting inflation is easier than battling deflation. The Fed could choose to go beyond market expectations in order to build in an extra "announcement effect".
   
NO UPFRONT COMMITMENT:

Given opposition within the FOMC from hawks, it is not inconceivable that
the Fed will find it hard to settle on a large upfront commitment. Instead, the Fed could announce purchases of about $100 billion a month, a figure that has already been cited by at least two top Fed officials, but hint at intentions to do more as economic conditions evolve.
   $500 BILLION TO $750 BILLION:
Perhaps the best way to win over skeptics is not to limit the initial amount of easing but rather to put a cap on its ultimate size. With Fed credit to the banking system already at $2.3 trillion, triple pre-crisis levels, some officials worry that an eventual exit from this ultraeasy stance will be made increasingly difficult with a larger balance sheet.
   
A FINITE COMMITMENT:

This is the least likely outcome. Markets have not priced in a significant easing in a vacuum. Fed officials, including Bernanke, have been careful to telegraph the central bank's intentions. By disappointing these expectations so severely, the Fed would risk undoing the lowered yields garnered by jawboning alone, potentially jeopardizing an already fragile recovery. The dollar would benefit, but at the expense of bonds, stocks and emerging market securities. — Reuters


A DELICATE BALANCE

When it comes to scope and pace of bond purchases by the central bank, consensus still eludes

Markets hope that Fed keeps its earlier commitment so that the move can spur lending and prop up a sluggish recovery
Amid all the conflicting signals, analysts have taken a line that it's Bernanke's dovish leanings that will save the day
Next week is critical as Fed meets to set the policy tone

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