QE3 Unlikely to Arrive Until Early 2013, Says Goldman

The odds of the Federal Reserve launching a third round of quantitative easing (QE3) this year have decreased considerably, according to Goldman Sachs economist Andrew Tilton.

Following the release of Ben Bernanke’s testimony to the U.S. Congress, Tilton published a note to clients detailing his outlook for monetary policy for the remainder of the year.  ”Notably, the prepared text did not include any mention of easing options,” the Goldman economist wrote, “though some market participants seem to have expected this, judging from recent client conversations and the market reaction immediately following the publication of the testimony. While this omission certainly does not preclude easing at the upcoming meeting, it does suggest that further action is by no means a foregone conclusion at this stage.”

Tilton later posted the following question – “What then should we expect from the FOMC at its upcoming meeting on August 1?”

“As previously noted, the lack of inclusion of easing options in the prepared testimony suggests a lower probability of a ‘big’ easing step, at least on the margin,” he added. “Furthermore, Bernanke has defended the recent extension of the twist as a ‘substantive’ easing; this is one reason why we have been doubtful that another asset purchase program would follow it quickly.”

As a result, Tilton contended that “The seemingly biggest easing option on the table, asset purchases, is the most controversial, and any ‘funding for lending scheme’ probably will require somewhat more preparation and planning. This leaves a cut in IOER (interest on excess reserves), which would seem very small by itself, or an extension in the rate guidance. To us, extending the current guidance that rates will remain ‘exceptionally low….at least through late 2014′ seems the path of least resistance should the Fed choose to ease in August or September. Moving the guidance out to mid-2015 would simply maintain the nearly three-year freeze implied by the current guidance when it was originally rolled out in January.”

He then concluded by summarizing his “base-case” scenario, which consisted of “an extension of the rate guidance by September, with a larger easing action (asset purchases or a “credit easing” program) in December or early 2013. “