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Dudley's and others comments guarantee QE2 in the US!

|Includes: SPY, iShares 20+ Year Treasury Bond ETF (TLT)
This morning, Cleveland Fed President  Pianalto came out in favour of a new round of quantitative easing:
 
The Fed must turn to "unconventional policy tools" such as lowering the interest rates on excess reserves, or "do further buying of long-term assets."
I also expect underlying inflation to remain near its current low level through next year, lower than the roughly 2% rate that I see as consistent, over the long run, with the Federal Reserve's objectives,
My focus is on bringing inflation back to 2%.
The Fed must turn to "unconventional policy tools" such as lowering the interest rates on excess reserves, or "do further buying of long-term assets."
 
 
But it is especially comments by New York Fed President Willam C. Dudley that should set of sparks. For some interesting reading this weekend, check out his (entire) speech in the link, below, The Outlook, Policy Choices and Our Mandate. For everyone else, just consider the following excerpts from his speech:
(bold italics mine).
 
With demand growth barely keeping pace with firms’ ability to increase productivity, job creation has been too weak to significantly reduce unemployment, which stands today at 9.6 percent. And, as is typical in such circumstances of considerable slack, the rate of inflation has declined.
Viewed through the lens of the Federal Reserve’s dual mandate—the pursuit of the highest level of employment consistent with price stability, the current situation is wholly unsatisfactory. Given the outlook that the upturn appears likely to strengthen only gradually, it will likely be several years before employment and inflation return to levels consistent with the Federal Reserve’s dual mandate.
 
Today’s low and falling rate of inflation—at a time when interest rates are near zero—is a problem that is slowing the adjustment process. Currently, by most measures, inflation is below the level that members of the Federal Open Market Committee (FOMC) view as consistent with price stability.
Second, and even more importantly, low and falling inflation can cause inflation expectations to decline. This is important because inflation expectations are an important factor that influences actual future inflation. Moreover, when inflation expectations decline, the expected real cost of credit increases.
 
So what could the Federal Reserve do? As I see it, there are two potentially complementary avenues. First, we could take steps to make our current highly accommodative stance of monetary policy more effective in stimulating economic activity by providing additional guidance about what we are trying to achieve today and in the future. Second, we could find ways to increase the amount of stimulus we currently provide via our balance sheet.
Some simple calculations based on recent experience suggest that $500 billion of purchases would provide about as much stimulus as a reduction in the federal funds rate of between half a point and three quarters of a point.
The FOMC would only engage in large-scale asset purchases in order to push the economy more rapidly toward the dual mandate goals of full employment and price stability
Currently, my assessment is that both the current levels of unemployment and inflation and the timeframe over which they are likely to return to levels consistent with our mandate are unacceptable. In addition, the longer this situation prevails and the U.S. economy is stuck with the current level of slack and disinflationary pressure, the greater the likelihood that a further shock could push us still further from our dual mandate objectives and closer to outright deflation.
We have tools that can provide additional stimulus at costs that do not appear to be prohibitive. Thus, I conclude that further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long.
 
 
 
Can that be any clearer?
 
 
Have a great weekend!
 
 
Asset allocation biases and advised option strategies 
 
·        Our Bund target is now around 2.70% on 10-year GGR, i.e. 128 December Bund. 
HOWEVER, keep your eyes pealed for a QE2 in the States: favour puts and put spreads to avoid being caught going the wrong way!




·        2800/2900 on the Eurostoxx 50.
The Eurostoxx call ladders are working perfectly, given the hike in the spot price and the passage of time.
We have even suggested and set up for certain clients 
call spreads and outright call purchases on the Eurostoxx on October and December, hoping for a little velocity, while benefiting from affordable implied volatility.
As valid as ever!!
 
Feel free to contact me for details on strikes and maturities.
 
 


Disclosure: Long 20 years OAT and 30 years BTP Zero Coupons, EDF Corp 5 Years 4.5%, Grece 2 Y and 10 Y bonds, Long Eurostoxx50 ETF