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QE Debate: What Did Powell Mean by “Need to Resume Balance Sheet Growth”?

Summary:
Some interpreted Powell's statement to mean more QE. There's a strong clue Powell meant something else. OK, but .... What did Powell Mean? ​ I confess, I thought Powell was talking about QE, but I did not see the exact quote. Powell said "organic growth". I believe Coppola has the correct intent. Intention vs Reality However, Coppola's point is mostly moot. What the Fed thinks it will do and intends to do, typically miss the mark badly on what it actually does. The Fed "intended" to dramatically shrink its balance sheet. Look what happened. Look at a Dot Plot of interest rate expectations from 2017. Dot Plot December 13, 2017 ​ Fade This Consensus That was my precise comment at the time. Some FOMC participants actually believed the Fed would hike to over 4.0% by 2020 (next year!). The

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Some interpreted Powell's statement to mean more QE. There's a strong clue Powell meant something else. OK, but ....

What did Powell Mean?

I confess, I thought Powell was talking about QE, but I did not see the exact quote. Powell said "organic growth".

I believe Coppola has the correct intent.

Intention vs Reality

However, Coppola's point is mostly moot.

What the Fed thinks it will do and intends to do, typically miss the mark badly on what it actually does.

The Fed "intended" to dramatically shrink its balance sheet. Look what happened.

Look at a Dot Plot of interest rate expectations from 2017.

Dot Plot December 13, 2017

Fade This Consensus

That was my precise comment at the time.

Some FOMC participants actually believed the Fed would hike to over 4.0% by 2020 (next year!). The majority believed rates would be over 3.0%.

Fed's Intended Meaning

So what?!

The Fed may do a brief period of "organic" expansion (which by the way can mean anything the Fed wants), but I propose more QE is coming whether the Fed "intends" to do so or not.

Fed's 2019 Interest Rate Expectations vs Market's Expectations

Here's a look at the Fed's 2019 Interest Rate Expectations vs Market's Expectations

I propose the Fed is wrong, again, as usual.

For discussion of today's FOMC decision, please see Fed Cuts Rates 1/4 Percent, Three Dissents: Dot Plot Suggests No More 2019 Cuts

Finally, we really do not know what the Fed "intended".

Perhaps the the Fed wanted to open the door for more QE later but without alarming the market of that.

Powell's words were chosen for a purpose but we really don't know what purpose!

Mike "Mish" Shedlock

Mike Shedlock
Mike Shedlock (Mish) is a registered investment advisor representative for SitkaPacific Capital Management (http://www.sitkapacific.com/). Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

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