The morning before the Federal Reserve announces its decision on quantitative easing, Wall Street has reached a consensus on how much the Fed will say it will spend on buying Treasuries to drive down medium term interest rates and stimulate the housing market and the economy in general.
The figure I keep seeing and hearing is $500 billion. That’s the size of a quantitative program that wouldn’t surprise Wall Street. So an announcement of a program of that size would make Wall Street happy, no?
Well, it’s never quite that simple on Wall Street.
As anyone who has paid attention during any earnings season knows, Wall Street frequently has an official number and a “whisper” number. The unofficial number, the one traders and analysts talk up when they talk amongst themselves, is frequently very different.
I was reminded of that yesterday, Tuesday November 2, when I overheard the traders who work next to me talking about the size of the quantitative easing program. They started out talking about $500 billion but quickly and excitedly started talking about $1 trillion or $1.5 trillion.
Those were the numbers that made them happy. If that’s what Wall Street is really hoping for then a $500 billion program will be a big disappointment.
I’d be the first to admit that my sample is rather small. But the same pattern shows up in the squawk from the big Wall Street investment companies.
New York Fed President William Dudley mentioned the $500 billion figure in a speech on October 1. On October 21 St. Louis Fed President said the Fed should buy $100 billion in long-term Treasuries this month and then calibrate. Atlanta Fed President Dennis Lockhart said that $100 billion a month was about right.
And then the Fed upset what seemed like a growing consensus on expectations by asking bond dealers, the folks who serve as market makers in bond sales, what size program they were expecting. They got answers that included $2 trillion and even an outlier at $4 trillion.
What if Wall Street got its wildest dreams fulfilled? (Well, maybe not its wildest $4 trillion dreams.)
I think global financial markets would freak. There’s already substantial overseas worry that the Fed’s strategy is designed to fix U.S. problems by drastically weakening the U.S. dollar and inflating the country’s way out of its debt problems. Central banks in emerging markets have been extremely vocal in complaining about the damage that a flood of U.S. dollars is doing to their economies and their financial markets.