Recent Fed commentary on the US economy has shown that the QE3 battle isn’t over but that the battle lines are now clear.
As a baseline, 2012 GDP at, or near, 2.8% means no QE3. GDP below 2% makes QE3 highly likely.
The current consensus estimate is 2.2% with estimates ranging from 1.5% to 3.4%. In his hawkish comments today Fisher said he sees 3% growth, putting him at the extreme edge.
It’s becoming increasingly clear that the Fed’s forecasts are overly rosy.
The FOMC’s November projection on growth was 2.5-2.9% but that fell to 2.2-2.7% in January. The Fed’s 2013 outlook is 2.8-3.2% and the economist median is 2.4%. In 2014, the divergence is even larger.
Even though the US added many jobs in Q1, growth was just 2.0%. Bernanke made it very clear yesterday and todaythat he sees no scope for a further improvement in employment unless growth picks up substantially.
It will be some time before the growth picture clears. Durable goods orders will be released on Wednesday and revisions to Q4 growth on Thursday but it’s not until late next with with the ISM non-manufacturing survey and non-farm payrolls that we will get any great sense of how the economy is doing.
The takeaway, however, is that the US economy will need to do at least as well as expected to keep the Fed on the sidelines. I don’t believe QE3 is necessary or will have a positive effect but I won’t fight the Fed, PIMCO and Goldman Sachs.
