09 August 2010

Trial Balloon For First Steps Toward Quant Ease 2: FT Says Fed Set to Downgrade Outlook for US

The Federal Reserve had used Washington Post business reporter John Berry to release trial balloons ahead of its actions to gauge market sentiment and to soften any reactions to changes in their policy outlooks.

Since John is no longer on the scene, have they switched to the Financial Times? This reporters speaks as though someone has already disclosed the intentions of the upcoming FOMC meeting.

This does sound like the sort of trial balloon we would expect to pre-release a change in the Fed outlook so that it does not suprise the bond markets.

Given the oversized percentage that the financial sector is taking from the real economy, like an unproductive tax on commercial business, it is unlikely that any measures will rejuvenate the US without creating another bubble.

"From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent." Simon Johnson
It is unlikely the Fed will announce any new programs on Tuesday. That will come intra-meeting, probably after another bad round of economic news, or on some event that makes it clear that the economic "recovery" is floundering.

Financial Times
Fed set to downgrade outlook for US
By James Politi in Washington
August 8 2010

The Federal Reserve is set to downgrade its assessment of US economic prospects when it meets on Tuesday to discuss ways to reboot the flagging recovery.

Faced with weak economic data and rising fears of a double-dip recession, the Federal Open Market Committee is likely to ensure its policy is not constraining growth and to use its statement to signal greater concern about the economy. It is, however, unlikely to agree big new steps to boost growth.

Smaller measures to help the economy could initially take the form of a decision to reinvest proceeds from maturing mortgage-backed securities held by the US central bank, thereby preventing the Fed’s balance sheet from shrinking naturally.

Investors will also examine closely any changes to the pledge made by the FOMC in June to “employ its policy tools as necessary to promote economic recovery and price stability”, which could be hardened if policymakers choose to signal the potential for more aggressive move to boost the economy in the future.

But even if that happens, most economists believe that it would take several more months of poor data for the Fed to actually begin a new round of asset purchases on the scale of those carried out during the recession....