By Denny Gulino

WASHINGTON (MNI) – Nomura Friday became the first major firm to
formally anticipate a change in Fed policy as soon as August 10 to alter
course toward some renewed quantitative easing, arguing that without the
change, Fed policy is becoming less accommodative week by week.

“We think there will be something in the (FOMC) language that maybe
reverts back to the language of 2009, around the first time they made
this statement, that the Federal Reserve needs to maintain an expanded
balance sheet,” David Resler, chief North American economist for
Normura, told Market News International.

“That begs the question, what does that mean to expand,” he
continued. “We don’t think they will actively buy things,” he said, but
that they will have to “back up their language.”

While the Fed now is committed “only to rolling over guvvies,” he
said, “they are becoming less accommodative each week. Mortgages are not
being replaced” and other shrinkage is taking place.

“They need to have a strategy for preserving (the balance sheet’s)
size. Does that mean they will reinvest paydowns. I don’t know, and
we’re agnostic on how they will do it.”

Just lowering rates “is not on the table any more,” he said, and
changing the rate of interest on excess reserves “is the last option
they would resort to.” At present “they are losing assets, so I think
they would not want to lose them.”

Getting into the practical implementation issue, “do they offset
dollar for dollar every prepay they at the time they get it?” Resler
asked. “They may not be able to do that.”

In any event, the change in language, while having its own effect,
won’t be enough. There will have to be activity, he said.

Resler and colleague George Goncalves have dubbed whatever is to be
done “QE light,” with a risk of other actions, such as cutting the rate
on excess reserves.

Overall, the Fed must do something because of the deterioration in
the data since March and the downward revision in the Federal Open
Market Committee’s outlook, Resler said. Nomura does not see another
recession, but a sufficient case based on economic performance for some
manner of easing.

** Market News International Washington Bureau: 202-371-2121 **

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