Goldman - Likely Easing by Early 2012

Yes... indeed the message is being heard loud and clear across the Street. You shall get your steroids my little pretties.... we've rallied 3%! in the SPY since 10:15 AMish. If the Pavlov dogs are trained well, we'll all do a David Tepper 2.0 for the next 7-8 months.

Goldman weighs in: We're getting Operation Twist and/or QE3 soon enough. Remember, we're currently in a

QE2.5

environment as it is due to the huge balance sheet of the Fed! [

Jun 27, 2011: Reinvestments of Bonds aka QE2.5 Will Still Yield $300B in Annual Fed Purchases

]

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BOTTOM LINE: Bernanke offers little guidance on near-term policy outlook, but extension of September meeting makes easing at this meeting a bit more likely than before. We continue to think that further easing via manipulation of the Fed's balance sheet —either through expansion or restructuring of the average duration of holdings—is likely by early 2012.

MAIN POINTS:

1. In light of the market attention preceding it, Fed Chairman Bernanke's Jackson Hole speech was clearly anticlimactic. He decided not to explicitly discuss the prospect for asset purchases, or indeed outline easing options at all. While the speech

does not change our overall view that additional monetary easing is more likely than not,

it adds uncertainty about the near-term course of communication and the timing of easing steps.

On the margin, it also raises the importance of the FOMC minutes released on Tuesday, and of the September FOMC meeting

2. Bernanke's remarks contained a short passage on the prospect for additional monetary stimulus. He reiterated that the committee “has a range of tools”, and that it discussed the costs and benefits of those options at the August FOMC meeting.

He added that the September FOMC meeting has been expanded to two days

to allow a fuller discussion of easing options as well as “other pertinent issues, including of course economic and financial developments”. Interestingly,

past experience suggests that the probability of easing is higher at two-day FOMC meetings, all else equal

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