Open-Ended QE3 Announcement Next Week, Says Goldman

Looking ahead to next week, the financial community will be eagerly anticipating the Federal Reserve’s decision on Thursday at the FOMC meeting.  Following this morning’s dismal U.S. jobs report, several economists updated their forecasts for what they expect from Chairman Ben Bernanke and his fellow central bankers.

Goldman Sachs’ chief U.S. economist, Jan Hatzius, reiterated his prediction that the Fed will announce the start of a third round of quantitative easing (QE3) next week.  In a note to clients, Hatzius wrote that “We now anticipate that the FOMC will announce a return to unsterilized asset purchases (QE3), mainly agency mortgage-backed securities but potentially including Treasury securities, at its September 12-13 FOMC meeting. We previously forecasted QE3 in December or early 2013. We continue to expect a lengthening of the FOMC’s forward guidance for the first hike in the funds rate from ‘late 2014’ to mid-2015 or beyond.”

With regard to the specifics of QE3, Hatzius’ “base case” is for “an open-ended asset purchase program of around $50 billion per month, with an end date that is not given in advance but made dependent on progress in the economic recovery.”

“We expect the criteria set for ending the program to be formulated in qualitative terms in the FOMC statement but explained in more detail in Chairman Bernanke’s press conference and in a statement from the New York Fed,” he added. “We expect Operation Twist 2 to be continued until its scheduled completion at the end of 2012.”

However, the Goldman Sachs economist cautioned that a QE3 announcement “is not a given” at next week’s Fed meeting.

“It is also possible that Fed officials will limit themselves to a lengthening of the forward guidance,” he noted. “In that case, we believe that they would try hard to find a way to not only lengthen the guidance but make this guidance more powerful by coupling it with a statement to the effect that ‘…a highly accommodative stance of monetary policy was likely to be maintained even as the recovery progressed’.”

Hatzius went on to say that “It is even possible that the committee would adopt Chicago Fed President Evans’ proposal to signal no rate hikes until the unemployment rate has fallen to a specific level (in Evans’ version 7%) unless underlying inflation rises above a specific threshold (in Evans’ version 3%). But that is not our base case.”