While many participants continue to focus on developments in Europe as the key driver in the foreign exchange market and the broader capital markets, they continue to wrestle with the implications of QE+. The open-ended nature is conditioned on a substantial and sustained improvement in the labor market.
Many observers are trying link this to a particular level of unemployment. This is misleading and Bernanke himself warned against it by explaining that 1) there was not an a priori target for unemployment and 2) a broad range of indicators will be used to glean insight into the labor market.
The unemployment rate gets too much attention and does not really say as much about the labor market as the participation rate. Chicago Fed's Evans, who will be a voting FOMC member next year, and among the most dovish members of the Fed suggested that substantial improvement in the is the creation of 200k jobs a month, a jobless rate below 8% and falling, and rising output (GDP). He did not see unemployment below 7% until the end of 2014.
A model at the Atlanta Fed projected that at a rate of 168k jobs a month, the unemployment rate could hit 7% by late 2014.
So what is the implication for the Fed's balance sheet? If the Fed replaces the Treasury buying being conducted under Operation Twist in January with QE+ purchases (total then of about $85 bln a month through all of next year) that will boost the Fed's balance sheet by about $1 trillion by the end of next year. This seems to be the minimum that is expected.
If the Fed chooses to continue through 2014, that would be another trillion dollars. The second year of purchase for a cumulative $2 trillion under QE+ is among the worst-cast scenarios.
Meanwhile although the Conference Board's measure of consumer confidence for September rose to its highest level since Feb 2008, business confidence seems to be deteriorating. The U.S. Business Roundtable survey for Q3 (conducted between August 30 and September 14) fell to 66 from 89.1, which is a record large quarterly decline and is now at it lowest level since Q3 09.
To further illustrate the erosion of business confidence recall that the index stood at 97 in Q1. The culprits are well known and neither the European woes nor the China slowdown is generally among them. The U.S. is its own worst enemy in this context. The fiscal cliff, the debt ceiling and uncertainty about federal taxes appear to be the main concerns of the CEOs of the Business Roundtable.
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