Did Federal Reserve just tip its hand to a third round of easing?
Federal Reserve's statement says it will review size of its securities holdings. Instead of creating more currency, Federal Reserve could sell its securities and buy government bonds.
With a subtle wave of his baton, the aspiring Maestro may have started the music for another round of Federal Reserve monetary easing.
The statement, which preceded the chairmanâ€™s first-ever news conference following a Fed Open Markets Committee meeting, simply stated that the group will â€śregularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability.â€ť
The change in wording was subtle, but for the market it was shorthand (or perhaps longhand, considering the chairmanâ€™s traditionally opaque language) that another round of quantitative easingâ€”QE3 in market parlanceâ€”was on the way.
In this case, it wonâ€™t involve the Fed printing more money to buy Treasurys. Instead, it will simply sell the $1.365 trillion in accumulated toxic junk on its books and then use those proceeds to buy more government securitiesâ€”in this case, likely a bit further out on the yield curve than the present shorter-dated targets.
If thatâ€™s the case, it lends more credence to the notion that Bernanke is aspiring to the â€śMaestroâ€ť title of his predecessor, Alan Greenspan, who earned the sobriquet by virtue of his gentle molding of the financial marketsâ€”until, of course, the whole thing exploded with the financial crisis of 2008 and 2009.
In fact, the hint was so deft that it left Bernanke enough wiggle room to keep the QE momentum goingâ€”the market has rallied 90 percent off the Fedâ€™s programsâ€”without actually having to go another round.
Instead, the chairman could use the whiff of easing just to keep the markets on the line for another rally.
The easing did not, in fact, have the actual dollar impact that many think, Ferry contends. Rather, it was a psychological tool used to goose the markets.
So is this just another mind game from Maestro Jr., or an actual liquidity infusion?
â€śAnyone will go on TV and tell you thereâ€™s going to be a QE 3, but none of them understand what QE 1 or QE 2 is,â€ť Ferry says. â€śIf people want to believe this (is QE 3) then the Fed is uncomfortably going along with it.â€ť