Thursday, October 28, 2010

What the Fed Could Learn from Moms at Halloween

Today brought news that the Federal Reserve (Fed) is passing a survey around to its primary dealers (i.e., large Wall Street institutions). Get this one, it is asking them for a projection of central bank asset purchases (aka, “QE2”) over the next 6 months, as well as potential effects on market interest rates and possible impacts on growth going forward. I’m sorry, but I don’t get it. Just yesterday, a Wall Street Journal author who some believe is used to leak the Fed’s intentions, printed an article that implied the Fed would take a very measured approach to QE2 rather than a shock and awe-style round of buying. It seemed to be a strategic move by the Fed to reduce expectations that have built up in risk markets over the last few months. The worry is that if the Fed disappoints in terms of the size or scope of QE2 following its November 3rd meeting, perhaps the markets will sell the news, which could undermine the asset reflation that they are looking to foster.

So, what happens when you ask these dealers for their “projections?” They shoot for the moon, of course! Not surprisingly, I just read an article that said at least four of the primary dealers are predicting QE2 will entail over a trillion dollars in buying. Why the Fed would seemingly look to manage expectations down on one day, only to let these dealers undermine those expectations the next day, I have no idea. What I do know is this: this weekend is Halloween, and something tells me that no mom in America would ask her kids how many bags of candy she should be buying. Seems like common sense, but then again, who said our Federal Reserve would use such a thing when setting monetary policy? Happy Halloween, Ben Bernanke…