As should have been expected, the June 21-22nd FOMC meeting had members discussing their exit strategy with days before QE2 was winding down. In the minutes they emphasized that a discussion of reversing policy in no way implies that it would be happen anytime soon. The talk was on a “set of specific principles that would guide its strategy.” With the state of the US economy, we know nothing will be implemented for a while as they revised down their GDP estimates. They do though think that some ‘transitory’ factors influenced growth, such as Japan. On inflation, sanguine continues to be their attitude towards it as they continue to expect headline inflation will recede over the medium term and the recent rise in core inflation doesn’t bother them. The stock market has bounced subsequent to the minutes on this one sentence, “Some participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation.” While QE3 calls are now out there, there are IF’s there and also “Others, however, saw the recent configuration of slower growth and higher inflation (WHAT WE CALL STAGFLATION, commentary mine) as suggesting that there might be less slack in labor and product markets than had been thought. Bottom line, the bar is extremely high for QE3 and I believe it only comes AFTER a 15-20% decline in stocks and a dramatic downturn in the US economy, thus those buying stocks right now on the possibility of QE3, be careful what you wish for. Buy after it becomes a MUCH greater possibility, at lower levels. As long as Ben, Janet, and William are running the Fed, more money printing is always a possibility but the next time will be much more contentious within the Fed.
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