Market Overview

Why We're Getting QE3

We just got the full statement from the FOMC and there were no changes, except one major one.

We went from three dissenters to one. The one was a dove, Chicago Federal Reserve President Charles Evans.

Evans said that he was in favor of additional easing, which shows that Evans is a bigger dove than Ben Bernanke.

I have written before about Evans being more dovish than Bernanke previously, but today was the first time we actually saw it in a decision.

Evans has talked about inflation targeting, employment targeting, and we may even begin to see nominal GDP targeting by the Fed. What does all of this mean? We are getting additional quantitative easing, which would be supportive of equities, commodities, and other risky assets.

To have a dove dissent from the majority consensus is something that may never have been done before. The FOMC is primarily made up of doves, including Evans, Janet Yellen, William Dudley, Sarah Bloom Raskin, and of course, Bernanke. The hawks are Dallas Federal Reserve President Richard Fisher, Philadelphia Federal Reserve President Charles Plosser and Narayana Kocherlakota, of Minneapolis.

Back in London, Evans said in a speech, “Given how truly badly we are doing in meeting our employment mandate, I argue that the Fed should seriously consider actions that would add very significant amounts of policy accommodation. “Such further policy accommodation does increase the risk that inflation could rise temporarily above our long-term goal of 2 percent.”

He also went on CNBC in late August, basically pleading for more easing. Evans has said previously he would be in favor of targeting a specific unemployment level, 7.5%. To get to 7.5%, the Fed would have to expand the balance sheet significantly, perhaps $1 trillion or more.

With Evans dissenting from his fellow doves for the first time, it is clear that we are getting more easing sometime in the future.

Hold on to your hats. It's going to be a bumpy ride.

ACTION ITEMS:

Bullish:
Traders who believe that Evans gets his way might want to consider the following trades:

  • Go long commodities, such as gold and silver. The U.S. dollar seems destined to go to lower, and Evans wants to make sure of this.
  • Also consider tech, which generates a lot of revenues overseas. Names like Apple (NASDAQ: AAPL) VMware (NYSE: VMW), and Amazon.com (NASDAQ: AMZN) may benefit.
  • This could also be bearish for the U.S. dollar (NYSE: UUP).

Bearish:
Traders who believe that no more easing will happen may consider alternate positions:

  • If something does not happen at the December or January FOMC meeting, we could see a sharp sell off in risk assets. Consider going long the CurrencyShares Swiss Franc Trust (NYSE: FXF), as it is still a safe haven.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: CNBC Long Ideas News Bonds Short Ideas Forex Econ #s Economics Best of Benzinga

 

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