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A Whiff of a “Mini” QE-2?

Courtesy of Bruce Krasting

The 100% certain sure thing in the market today is that QE-2 will come on November 3rd and that it will be decisive in its scope. Well I am not so sure any more.



-The Fed’s Beige Book from yesterday did not make a case for an economy that needed emergency measures. Yes there was some discussion about the weak housing market and soft loan demand. But we know that QE-2 is not going to fix those problems.



-It is of significance to me (and should be to all) that Zero Hedge was featured in a Time/CNN article titled, Will the Federal Reserve Start a Civil War?



I am certain that the Fed reads Zero Hedge. But how much influence they have is a question. When it gets up to Time magazine however, it is another matter altogether. It is not possible for the Fed to avoid the collective roar that is coming from across the country at this point. If the Fed blunders with an unpopular QE-2 the results will be disastrous. Not only will the economy tank but the Fed will have lost a good chunk of its remaining credibility. The downside risks to Bernanke are enormous. I don’t think he believes he is in a popularity contest, but he does know he can’t run monetary policy with protesters outside his door. How much is he prepared to gamble given that he clearly does not have a consensus amongst his own board? He is an academic, not a gambler.



-Today St. Louis Fed Bullard made remarks to reporters that were a warning sign to me (and the market). He talked a much different game than what has been dished out of late. He made reference to a smaller program. Maybe less than $500billion (about half what is now in the street). He also threw out something that blew me away. He suggested that the 11/3 decision was in someway dependant on the Q3 GDP numbers that come out before the Fed meets. Bullard even “spun” the numbers on the hot side:



“it may come in a little stronger than the second quarter.” So we have to keep our eye on that.”


Bond traders shit in their pants and hit bids on long coupons. I like that read. Bullard gave us a hint that maybe this QE-2 is not such a slam-dunk. (See ZH story on Bullard)



-The WSJ had a market story about Bullard’s comments but their big gun on QE, Jon Hilsenrath, has been quiet. Should the press follow with the new question mark on the timing and scope of QE2 we may have an October surprise that is bigger than a SF-Texas series.



I started this with; “The 100% certain sure thing in the market today is that QE-2 will come on November 3rd and that it will be decisive in its scope.” If that certainty factor falls to 50% the S&P is going to take a big dump. That possibility is simply not in the print at the close.




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