To QE Infinity and Beyond

Weekly Update – December 17, 2012

Markets appeared to be in a holding pattern last week as traders await a fiscal cliff deal. Equities finished the week slightly in the red, pushed down by fresh concerns that lawmakers may not reach a deal this year. For the week, the S&P slid 0.32%, the Nasdaq trimmed 0.23%, and the Dow slipped 0.15%.[i]

Despite ongoing talks, no fiscal cliff resolution is imminent. While Congress had expected to recess last Friday, lawmakers are delaying their holiday break to see the process through and may stay until Christmas, if necessary. In a new twist, sources close to the talks say that House Speaker John Boehner has offered up tax increases on incomes above $1 million as part of a deficit reduction deal to move negotiations forward. In exchange, Republicans want tax cuts extended for all incomes under that amount, as well as spending cuts to entitlement programs.[ii] While we don’t know if a deal is around the corner, this shift toward compromise on both sides is an important breakthrough.

Last week, the Fed made a huge, game-changing step towards adopting a more aggressive, expectations based monetary policy. On Wednesday, the FOMC announced QE4, promising to buy $45 billion in longer-term Treasuries on top of its monthly purchase of $40 billion in mortgage-backed securities. In an unprecedented move, the Fed also announced that it will keep interest rates low until unemployment falls to at least 6.5%, as long as inflation remains below 2.5%.[iii]

Tying monetary policy to specific guideposts is a fundamental shift in the way the Fed does business and moves it much closer to fiscal policy. We have hopes that this bold move will entice business leaders to move some of their cash stockpiles off of the sidelines and into the markets, giving the economy a much-needed boost. At the same time though, we’re concerned about how the Fed will ever be able to disengage (by selling off bonds) from this massive purchasing program without sending markets into a decline. Only time will tell the whole story. Next week analysts will be watching the release of GDP and unemployment numbers and waiting hopefully for more news from Washington.

On a final note, we feel compelled to acknowledge the tragic loss faced by the families of Newtown, Connecticut. Our hearts go out to the community who unjustly lost 26 precious lives.[iv] Though words cannot express the pain they are facing, may we at least be reminded how important it is to cherish our friends and family members with every moment we have.


Monday: Empire State Mfg. Survey, Treasury International Capital


Tuesday: Housing Market Index

Wednesday: Housing Starts, EIA Petroleum Status Report


Thursday: GDP, Jobless Claims, Existing Home Sales, Philadelphia Fed Survey

Friday: Durable Goods Orders, Personal Income and Outlays, Consumer Sentiment

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