Fed Expected To Enact $1-Trillion-Worth Of Easing

The Federal Reserve is likely to step in with $1 trillion worth of easing that could be announced as soon as this month, according to a growing consensus of economists who see the recent uptick in economic growth as unsustainable.

Tetra Images | Getty Images United States Federal Reserve

With the Fed’s Open Market Committee set to meet next week, expectations are rising that the languishing housing market will drive the central bank to buy up mortgage-backed securities.

The goal of the purchases will be to drive down interest rates even further from current record-low levels, and, less obviously, to spur confidence that more monetary tools remain to stimulate the economy.

Of course, the announcement also could push stock prices higher, as did the Fed's last balance sheet expansion begun in November 2010.

Just a few months ago, market observers speculated that another round of quantitative easing

— QE3, in this case — would be politically infeasible and probably unnecessary given hopes for better growth in 2012.

 

Jeff Cox
Senior Writer
CNBC.com

But with housing stuck in neutral and a European recession on the horizon, economists believe QE3 is all but certain.

Andrew Wilkinson, chief economic strategist at Miller Tabak, released a paper Thursday that makes the case for more easing, which he said could push stock prices higher to where the Standard & Poor’s 500 [.SPX 1310.08 -4.42 (-0.34%) ] rises another 11 percent to 1450.

Among a host of supporting data points, perhaps the most interesting is that comparing the amount of equity homeowners have to disposable household income reveals a stunning fact: the ratio has fallen to 54 percent, which Wilkinson called "unprecedented" territory.

The upshot is that because home values have fallen so far, real wealth has plunged as well. And the reason home values have fallen so far is because excess inventory is pushing down prices, a phenomenon he thinks the Fed has no choice but to fight.

"This simple fact represents uncharted territory for the Federal Reserve," Wilkinson wrote. "Despite a recovery in growth and employment, the crippling damage inflicted by the subprime warhorse continues to play a worrisome role behind the scenes."