QE3 Postponed Until Late 2012 or Early 2013, Says Goldman

The Federal Reserve is unlikely to launch a third round of quantitative easing (QE3) until either late this year or early in 2013, according to Goldman Sachs chief U.S. economist Jan Hatzius.

In his latest note to clients, Hatzius – who previously predicted a QE3 announcement at next month’s FOMC meeting – argued that the recent collection of better than expected U.S. economic data is likely to keep Ben Bernanke and his fellow central bankers on hold for the time being.

“The US economic recovery remains sluggish, but we believe that it will pick up a bit in coming months,” Hatzius wrote. He cited yesterday’s encouraging retail sales data and slower inventory accumulation as evidence supporting the recovery.  ”Our proprietary measures of US economic growth have also picked up a bit further,” he added. “Our Q3 GDP tracking estimate rose to 2.3% from 2.2%, our current activity indicator (CAI) now stands at 1.2% in July after 1.1% in June, and our US-MAP index of US economic data surprises is moving quickly further toward neutral readings on a 60-day exponential moving average basis.”

Hatzius went on to say that “Although Fed officials clearly adopted a strong easing bias at the July 31-August 1 FOMC meeting, we do not think that this amounts to a pre-commitment to QE3. Instead, we believe that continued weakness is necessary to prompt a substantial easing move. And so far, that weakness is not showing up in the data. Among the top-tier indicators released since the meeting, only the July ISM manufacturing index was a (modest) disappointment. In contrast, the July employment report was at worst a split verdict, the July nonmanufacturing ISM was a bit better than expected, jobless claims have surprised on the low side over the past few weeks, the June trade deficit showed an unexpected decline, and the July retail sales report surprised on the upside.”

While the Goldman economist did not discuss the implications of his forecast for gold prices or the broader financial markets, the postponement of QE3 would likely present a headwind for U.S. dollar-denominated asset classes.

He concluded by noting that “The uncertainty around the near-term trajectory of Fed policy remains substantial. Several FOMC meeting participants, specifically Presidents Evans, Rosengren, and Williams, are making the case for additional easing via potentially open-ended balance sheet expansion. And it might well be that Chairman Bernanke will use his speech at the upcoming Jackson Hole Symposium to explain why the Fed’s mandate calls for further accommodation in the near term. We will be receptive to these messages and will review our monetary policy forecasts as needed. But our call remains that the return to QE will not happen until late 2012/early 2013, and at the margin the recent data have made us a bit more confident.”