Silvia, Hoffman Say Fed’s Statement Suggests No Need for QE3

John Silvia, chief economist at Wells Fargo Securities LLC, and Stuart Hoffman, chief economist at PNC Financial Services Group Inc., said the Federal Reserve’s statement today indicates that there will be no third round of quantitative easing by the central bank.

They spoke after Fed officials met in Washington today and said in the statement that the recovery is gaining strength.

Paul Ballew, a former Fed economist and a senior vice president at Nationwide Mutual Insurance Co., Diane Swonk, chief economist at Mesirow Financial Inc., and Jim O’Sullivan, chief economist at MF Global Inc., also commented.

Silvia:

“This statement takes QE3 off the table as they are taking off the downside risk in deflation and saying the economy is on track.”

“They are coming to the view that the economy has improved over time. They are going to finish QE2. There is no need for more stimulus at this point.”

“They are putting a positive spin on the whole commodity issue. They are getting slightly higher inflation numbers, which is pretty much what they want. They are giving a message that while inflation is rising, it is within their plan so it is ok.”

Hoffman:

“I would call it one of the more positive statements they’ve made on the economy since the recovery began.”

“But it hasn’t reached a point yet that it would call for any near-term change in the Fed funds rate or the completion of QE2.”

“The FOMC statement or outlook was pitch black, then it was dark grey and maybe this is a lighter grey, but it’s not green yet.”

“Their assessment of the economy or at least recent economic conditions seems to be a little bit of an upgrade, with words like ‘firmer footing’ and even referring to the labor markets as gradually improving.”

“My base case is they finish QE2, they’re done and there’s no QE3 and maybe a year from now they’ll start to raise the Fed funds rate. Between now and then, they’ll give the markets a heads up by removing the ‘extended period’ phrase.”

“They finish QE2, they go dormant and they’re dormant in the second half of this year and then start dropping signals at year end that the day of reversal of policy is coming.”

Ballew:

“The Fed said what many private forecasters have been saying for quite a period of time: that the economy is on firmer footing.”

“They were a little more dismissive on commodity prices and inflation pressures than I would have expected, but that’s not a surprise: that’s been their position.”

“The Fed, from a PR standpoint, got up today and played it straight down the middle because there is enough information affecting the markets and the Fed had no desire to contribute to all the noise out there.”

“They certainly understand what the risks are out there and the risks are greater than they were 60 days ago: from the Middle East and oil prices to Japan and how that could affect financial markets and regional growth. It’s not a surprise they’re going to keep their powder dry and see how things play out.”

“Their biggest challenge is global events outside of their control: oil prices and the Middle East and Japan and asset bubbles in Asia. The Fed is trying to deal with all those global factors while also dealing with what is still a fragile economy” in the U.S.

Swonk:

“My guess is that the nod to the stronger economy was enough for the hawks.”

“All of the uncertainty out there was enough to keep the hawks on the sidelines and not get those dissenting votes that you very much could have gotten at this particular meeting.”

The next issue for the Fed “is whether or not they continue to backstop the size of their balance sheet by replacing maturing mortgage-backed securities with Treasury bonds.”

“That will be the next decision. I think that will be very difficult for the Fed to do that at this stage of the game. I think they will let their balance sheet run off as long as the economy is stabilizing, even though they’d still be out of their dual mandate.”

O’Sullivan:

“Certainly, this the most optimistic Fed officials have sounded since asset purchases began in November and, at a minimum, that’s consistent with the expectation there will be no third round of purchases.”

“But there’s not enough sustained strength in growth numbers yet for them to start talking about reversing stimulus. The turmoil in markets in recent days adds a new element of uncertainty, but coming into the turmoil, the momentum in growth numbers was looking increasingly impressive, including in labor markets.”

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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