The January 30 FOMC meeting press release provided little tangible insight into when QE will come to an end, but it did provide a couple of hints.
Hint #1: Esther George
Esther George, President of the Kansas City Fed, cast a dissenting vote. This means that she is continuing the hawkish Kansas City tradition. This is relevant because the makeup of the FOMC in 2013 is particularly dovish, so a dissenting voice could pull some of the more moderate voting members (namely Jerome Powell and James Bullard, but possibly also Elizabeth Duke, Jeremy Stein, and Sarah Bloom Raskin) away from continued stimulus over the next few months.
Hint #2: Even Split
Previous FOMC minutes and murmurings from within the Fed indicate that the Committee is roughly evenly split on whether QE3 will come to a close in mid-2013 or later. This indicates that if the numbers look like they did for December, we will have QE until year-end, but if they look like we all expect January to look, then QE may come to a close over the summer.
Hint #3: Diminishing Returns
As just about everyone has noted, QE2 did less to push down interest rates than the first round of QE, and QE3 is doing even less than QE2. To some extent this is necessarily because rates can’t go much lower, but what is more interesting is that bond yields are climbing. This is a sure sign of recovering and despite the Fed’s downward pressure market demand seems to be slowly migrating back to riskier assets, making it tougher for doves to justify continued QE.
Hint #4: Race to the Bottom
In the global race to the bottom that is modern central banking, almost every bank in the world has taken steps to depreciate their currency. However, despite facing a triple-dip recession, the Bank of England seems to be taking a break from currency devaluation. Common logic indicates that this is simply a result of an outgoing governor not wanting to start a new policy that will be passed along to his successor, but it may be something more. It might be recognition of the fact that like American businesses, British businesses have enough cash on hand, it is simply not moving through the system rapidly enough. Perhaps this will result in a program to increase the velocity of money rather than simply adding to the piles that sit stagnant in the economy. (Note that the Bank of England tried “Funding For Lending” on a small scale to stimulate the exchange of money; it was moderately successful.) If this is the case, it could mean the beginning of a truce whereby central banks can stop devaluing their currencies just to keep pace with other countries weakening their currencies.
Given that the 2013 Committee has a hawk to keep them honest and indications are that several members are already considering ending QE3 mid-year, it is not unreasonable to start talking about an investment timeline. Moreover, the diminishing returns of QE coupled with a potential for détente between central banks racing for the bottom means that the doves will have much shakier ground on which to stand, assuming the economy continues to grow. So, what exactly is the timeline?
Since Chairman Bernanke clearly prefers to make major policy changes at meetings when he is holding a press conference, the primary targets to watch are June 19, September 18, and December 18. If the hawks have their way, it will be June 19. If the doves have their way, it will be December 18. Since the Chairman of the Fed is above all else a consensus builder, I suspect that barring an unforeseen crisis (or a foreseen one made by our dysfunctional political system) the date to target for the end of QE3 is September 18. Obviously a lot can change in the next 8 months, but given the information available right now, that appears to be the most likely date.
Assuming that date proves to be accurate, some very intelligent analysis suggests that the last sustained market highs before the end of QE2 occurred roughly four months out. Although conditions are different now, and we are not facing the same headwinds from Europe, that would make the smart move to follow the old adage and “sell in May and go away.”