During the Fed Chairman’s speech in Jackson Hole, Wyoming on Friday morning many investors will be listening closely for signs that the Federal Reserve may be moving closer to a third round of quantitative easing, commonly described as QE3, to help push long term interest rates down and stimulate the U.S. economy.
The Fed minutes from the last July 31-August 1st meeting signaled an increased openness or willingness for the Fed to engage in a new round of bond buying or asset purchases.
However, the economic data points which Fed members reacted to during their Fed meeting pointed to softer U.S. economic data in early summer which has gradually improved in recent weeks, lessening the likelihood for more easing measures from the Federal Reserve.
The June jobs report only showed gains of 80,000 new jobs when the minutes were drafted compared to 163,00 jobs added in July, released after the Fed meeting. Still, the U.S. unemployment level remains fixed above 8% and even crept up to 8.3% in July from 8.2% in June.
Other economic data points in housing and retail spending show a gradual improvement in the U.S. economy, although a recent increase in gas prices over the past several weeks does have the potential to slow down discretionary spending levels in the broader U.S. economy.
The most recent economic data released today in U.S. consumer spending show that U.S. purchases increased 0.4 percent in July, down from estimates of 0.5 after no significant change in June. Jobless claims were at 374,000 for the week, showing a little change. Personal income was in line with estimates.
The next FOMC Meeting is set for Sept. 13, 2012 and many economists believe that if the Federal Reserve does want to engage in QE3, it will be announced during the Sept 13th meeting after receiving more economic data to support taking a dovish position.
Taking a dovish position to engage in easing too soon in the midst of gradually improving economic data points may prove to be counterproductive and overeactive, especially considering U.S. stock markets are near 4 year highs.
The Fed has already pumped $2.1 trillion into the U.S. economy through the first two quantitative easing programs.
In September 2011, the Fed announced plans to lower long term interest rates through an operation called “Operation Twist,’’ whereby the Fed purchases $400 billion in long-term Treasury securities from the sale of short-term government debt.
In June 2012, the Fed decided to extend “Operation Twist” for six more months through the end of 2012 by purchasing $267 billion in long term securities.