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Does "Modest to Moderate" Mean a Cut in QE?

Posted by Joseph Trevisani on Sep 4, 2013 2:46:00 PM

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Will the continued slow improvement in the American economy provide sufficient cover for the Federal Reserve to begin the end of quantitative easing at its next meeting?  Until the release of the FOMC statement in two weeks no other question will matter quite as much to the markets.

In the Federal Reserve’s latest assessment, its Beige Book, the U.S. economy has maintained a 'modest to moderate" rate of expansion across all twelve Fed districts, much as it has for the past year.

"Consumer spending rose in most districts, reflecting in part strong demand for automobiles and housing-related goods' said the report. Activity increased in travel, tourism, manufacturing and non-financial services.

Mortgage rates have risen more than a percentage point to 4.5 percent from 3.4 percent four months ago largely in response to the Fed's own comments about the prospective end of its $85 billion a  month in securities purchases. But according to the central bank this has not dampened hosing sales.

"Reports from several districts suggest that rising home prices and mortgage interest rates may have spurred a pickup in recent market activity as many 'fence sitters' were prompted to commit to purchases," said the report.

Hiring has gained modestly or remained steady for most jobs and industries according to the report.

Chairman Bernanke has suggested that an unemployment rate in the range of 6.5-7.0 percent would be an acceptable target for the end of the easing program.  The unemployment rate has dropped 0.5 percent since January and 0.8 percent over the past year to its current 7.4 percent, .

There has been intense debate at the FOMC about the effectiveness of quantitative easing in eliciting economic growth and the risks inherent in the policy including artificially induced levels in equities and perhaps housing.

Stocks had their worst month in August since May 2012.

Joseph Trevisani

Chief Market Strategist


Charts: Bloomberg

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