Paging Bernanke: Strategists Weigh in On the QE3 Question

Every miserable bit of economic data contains an ember of hope, and that ember is called QE3. As investors sell off every risky asset they can find today in response to weak May jobs numbers, they are holding onto hope that if things get bad enough Fed Chairman Ben Bernanke and Co. will save the day.

Many analysts do expect the Fed to take some action in the coming weeks, but have tended to pour cool (if not cold) water on the theory that today’s weak report paves the way for a full QE3. Board members are scheduled to meet on June 19 and June 20 and Bernanke is scheduled to speak before the Joint Economic Committee of Congress next Thursday.

Jeff Kleintop, Chief Market Strategist at LPL Financial: “Today’s data makes QE 3 a higher probability. With data weaker than Fed forecasts, excess slack in the economy, rising worries about the potential for deflation, and the tight fiscal policy on tap for next year the Fed is increasingly likely to announce a new program as Operation Twist ends this month.”

John Ryding, RDQ Economics: “Today�s data will strengthen arguments for additional support for the recovery by the Fed. But at the same time, four of the initial 2011 employment reports showed gains below 60,000 and two below 20,000. Many observers overestimate the true value of such data points, even measured over quarterly periods.”

Steve Blitz, ITG Investment Research’s chief economist thinks monetary policy can only do so much at this point: “As we noted a couple of weeks ago, the magic is gone as far as monetary policy being able to conjure an upbeat outlook among investors � both here and abroad. This means government spending. Has there ever been a cheaper time for government to finance the building of bridges or dams or highway?”

Michael Cloherty of RBC Capital Markets sees a 60% chance that the Fed will respond by buying MBS Securities, a 20% chance that they will extend language forecasting low interest rates into 2014, and a 10% chance the Fed will extend Operation Twist: “Today’s employment report takes us a step closer to QE3, although we still think some additional softening in risk assets is needed to trigger a move…� [T]he main goal of further stimulus would not be having a concrete impact through changing riskless asset prices, but a way to signal to investors that the central bank is still trying to support risk assets, which would hopefully make investors more aggressive.� This means that the size of any QE3 would likely be much smaller than the sizes of QE1 and QE2 � something smaller than $500 billion.”