The Odds in Favor of Quantitative Easing Increases Says Goldman Sachs

By TJ Kim

September 11, 2012

Last week’s report on the Employment Situation alerted the nation with the current state of the labor market. The Labor Force and the Unemployment shrank together by significant amount. The report re-emphasized that the past stimulus package has been not effective in reviving the U.S. economy, especially in employment that has lingered at above for the past three years. As a result, Bureau of Labor Statistics’ release of the employment data raised the likelihood of the next round of Quantitative Easting at the next FOMC’s meeting.

Economists from Goldman Sachs recently raised their probability estimate for the QE3 to above 50% and wrote,

“We now anticipate that the FOMC will announce a return to unsterilized asset purchases (QE3), mainly agency mortgage-backed securities but potentially including Treasury securities, at its September 12-13 FOMC meeting… We continue to expect a lengthening of the FOMC’s forward guidance for the first hike in the funds rate from “late 2014” to mid-2015 or beyond.”

While it is hard to gauge the details of the potential QE3, Goldman Sachs economists noted,

“…base case is that QE3 will be formulated as an open-ended asset purchase program of around $50 billion per month, with an end date that is not given in advance but made dependent on progress in the economic recovery. We expect the criteria set for ending the program to be formulated in qualitative terms in the FOMC statement but explained in more detail in Chairman Bernanke’s press conference and in a statement from the New York Fed. We expect Operation Twist 2 to be continued until its scheduled completion at the end of 2012.”

As of now, however, the Quantitative Easing 3 remains a mere possibility. Although the equity market soared with the “edged-up” anticipation for the QE3, it will not be an easy decision that the FOMC may make as early as at the next meeting. In case the FOMC does not announce the QE3 at the next meeting, the Fed Officials is likely to rely on the communication to extend the forward guidance even after a certain degree of the recovery is achieved.

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