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QE3 to reach $1.2 trillion by termination date: Evans

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QE3 to reach $1.2 trillion by termination date: Evans

Market participants looking to pinpoint the inevitable end to the US Federal Reserve’s asset purchases should take notice to recent comments made by Charles Evans, President to the Fed Bank of Chicago. Evans, who is one of the most vocal supporters of accommodative monetary policy, remarked recently the Fed would have made at least $1.2 trillion worth of bond purchases from January 2013 until the time of QE’s termination in the middle of 2014.

For those keeping track, the Fed’s $85 billion monthly asset purchases will have reached $680 billion by the end of August. Based on Evans’ projection, we are approximately half way in dollar terms to the end of QE3. In the unlikely event the Fed maintains its current pace until the end of the year QE3’s total commitment would reach $1.02 trillion in 2013. Unless the Fed is planning a sudden rather than gradual taper, this figure doesn’t support Evans’ timeline. If the Fed decides to scale back quantitative easing to $65 billion by September (a figure and timeline supported by the consensus), the Fed will in all likelihood be in-line with Evans’ projections. This would also enable a gradual reduction of stimulus at a pace of around $20 billion until QE3’s termination next summer.

However the numbers play out, portfolio managers in the United States and around the world are preparing for the inevitable demise of one of the Fed’s most aggressive easing strategies in history. This week investors were reminded once again the extent to which the debate over the timing and pace of bond tapering could impact the equities market.

Wall Street’s negative reaction to stimulus reduction is likely due to its less optimistic outlook on economic growth when compared to the Fed. Despite its recent dovish attitude, the Fed has forecasted growth as high as 2.6 percent for 2013 and 3.5 percent for 2014. Private forecasters on Wall Street see the US economy growing at a rate of 1.9 percent in 2013 and 2.7 percent in 2014. It is clear from these projections Evans isn’t the only one who supports the Fed’s vague timetable.

We will likely not know for certain the precise timeframe for stimulus reduction until the September 17-18 FOMC policy meetings. What we do know is the economic data are increasingly showing deepening US recovery, a welcome sign to a Federal Reserve that has seen its balance sheet swell to over $3.5 trillion over the past four years.

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