The eyes of the market are on the Fed now that the president has spoken and not provided a specific fiscal plan. We note that fiscal policy will be more effective during a liquidity trap, but no one is making that as a strong argument. ( I have commented on the negative impact of a the deficit and the need to be firm about a debt ceiling, but I can sill be in favor of fiscal policy. The trade-off o short-term stimulus in exchange for long-term structural change is necessary.)
The market is expecting more monetary action but there are limited choices.
1. Say policy will be loose for an extended period of time. We have already said that, and it may not work to cause more demand.
2. QE3 with more Treasury buying. This will increase inflation expectations and have a positive impact on stocks.
3. Cut the rate on reserve balances. This never should have been done in the first place, but it will not have a strong effect.
There are no choices except to inflate. This will be be dollar and bond negative. It will boost stock values. If we do not get positive statements for action from the Fed, equities will continue their decline.
The market is expecting more monetary action but there are limited choices.
1. Say policy will be loose for an extended period of time. We have already said that, and it may not work to cause more demand.
2. QE3 with more Treasury buying. This will increase inflation expectations and have a positive impact on stocks.
3. Cut the rate on reserve balances. This never should have been done in the first place, but it will not have a strong effect.
There are no choices except to inflate. This will be be dollar and bond negative. It will boost stock values. If we do not get positive statements for action from the Fed, equities will continue their decline.
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