No prizes for guessing what the lead story is today—the launch of the good ship QE3. Front pages for all: “Fed Links New Aid to Jobs Recovery in Forceful Move” in the New York Times (NYT), “Fed Acts to Fix Jobs Market” in the Wall Street Journal (WSJ), and “Bernanke takes plunge with QE3” in the Financial Times (FT).
This is a big story. Although more QE (i.e., quantitative easing) is not necessarily a big deal, the way it’s being done shows that the Fed is all in: the open-ended nature of the program, the specific commitments, and the fact that it will go in conjunction with the existing Operation Twist. This is well in excess of what the Fed had to do, and well in excess of what many—mostly Republicans—thought it should do. The FT described the move as “stunningly bold” in a sidebar on the front page. This is a political bet, made necessary by the Fed’s conviction that—in the face of fiscal and political uncertainty in the U.S.—the economy would continue to be very weak and unemployment unacceptably high, if nothing more were done.
Markets melted up, recognizing that the open-ended commitment means the old adage “Don’t fight the Fed” is alive and well, as reported in the NYT (p. B1) with “Fed Action Spurs a Broad Rally; S&P Rises 1.6%.” Inflation expectations are rising, as are commodity prices. We have seen this reaction before, after previous announcements, and the results have not always held. It remains to be seen whether the market reaction will hold this time.
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There are still substantial risks out there. Egypt, a core U.S. ally in the Middle East, is now even more at risk after the Libya tragedy. “Egypt, Hearing From Obama, Moves to Heal Rift From Protests” (NYT, p. A1), “Strife tests Washington’s goodwill to Brotherhood” (FT, p. 2), “Mideast Turmoil Spreads” (WSJ, p. A1),and “Protests Put Egypt Relations on Edge” (WSJ, p. A8) all point to the fact that the Arab Spring, especially the takeover of the Egyptian government by the Muslim Brotherhood, has changed the game for the worse from a U.S. perspective. This is all layered on top of the U.S./Israel/Iran nuclear issue, which still continues to cook. If Egypt really moves more into the Islamist camp and renounces the peace treaty with Israel, the U.S. position becomes much less tenable—with all that means for energy supplies.
China and the surrounding area is another risk point. Xi Jinping has still not reappeared, leading to an “Off-Script Scramble for Power in Chinese Leader’s Absence,” per the front page of the NYT. The FT’s “Missing leader-in-waiting sends signal” (p. 5) and the NYT article lead to questions about the stability of the pending leadership transition in China. “Chinese Ships Enter Waters Japan Controls” (NYT, p. A5) and “China Irks Japan with Patrol Ship Incursion” (WSJ, p. A7) point out that the risks to China are both external and internal.
Not all the news was bad, though. The U.S. Congress continues to try to get its act together. “House Republicans Welcome Back Ryan, and His Vote, on a Spending Measure” (NYT, p. A14) and “Spending Package Passes in House” (WSJ,p. A4) talk about the passing of an interim spending measure designed to keep the federal government operating into next year; this shows that there is at least the possibility that Congress will come together to resolve some of the current uncertainty. The Dutch election results seem to be favorable for the euro, according to “Dutch and Germans Give European Union Reason to Cheer” (NYT, p. A14), although the WSJ notes that “Threats Lurk in Europe Despite Breather” (p. A10), as I have said numerous times.
Quick hits:
Have a great day!