The financial markets have factored in the impact of more quantitative easing by the Federal Reserve, and anything short of $500 billion worth of easing in tomorrow's announcement could rattle the markets, according to Deepa Majmudar, who manages nearly $4 billion in fixed-income portfolios at J.P. Morgan Asset Management.
“The market is already expecting $500 billion worth of easing and the Fed does not want to disappoint the market,” she said.
The Fed is expected to announce tomorrow afternoon its plans for what has become known as “QE2,” representing the second round of Treasury bond purchasing by the Fed.
The first round of quantitative easing, designed to generate increased lending activity, began in 2008 and ended in March after the Fed had cut its short-term lending rates to near zero.
Ms. Majmudar expects tomorrow's announcement to target five- to 10-year Treasury bonds and have no specific ending date.
“The primary objective [of quantitative easing] is to keep interest rates low across the yield curve, but there has to also be some demand for the money in order for this to work,” she said.
A successful quantitative easing policy would lead to even lower rates on mortgages as well as other business and consumer loans, and even though Ms. Majmudar supports the plan, she admits the demand for credit is still the stubborn part of the equation.
“Clearly economic growth ultimately has to come from the economy itself,” she said. “But a step has to be taken so the money doesn't just sit there.”
QE2, she added, is “providing support while the economy is still weak and it is better to do it than to not do it.”
With expectations for QE2 where they are, Ms. Majmudar said there is some risk of disappointment if the volume level is lower — or a rally if the announcement is much higher than anticipated.
However, the most likely scenario, she said, is that the bond market has already factored in higher inflation expectations over the long term.
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