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2011-08-17

QE3 - Most likely scenario

A third round of quantitative easing (QE3) by the Federal Reserve is now considered the “most likely scenario,” for U.S. monetary policy, according to Goldman Sachs.

In a report to clients, Francesco Garzarelli - chief interest-rate strategist at Goldman Sachs – wrote that “The recent sharp price action in equities and bonds has probably more to do with a focus on ‘tail risks’ in an anaemic US growth environment, concerns about a broader global growth slowdown (as reflected in the sharp moves in global indices and cyclical currencies) and positioning considerations, rather than outright weakness in the incoming data.”

“The macro backdrop and the tightening in US financial conditions that it caused precipitated a further round of policy easing by the Fed,” he continued. ”The central bank has indicated that its current economic forecasts warrant policy rates remaining close to zero for at least another two years and that it stands ready to expand its balance sheet further if needed.”

Based on these developments, Garzarelli noted that “We have built a third round of long-term asset purchases (‘QE3’) into our baseline, although that is, of course, contingent on sub-trend growth in the near term. Judging from our client interactions, and recent investor surveys (e.g., CNBC/Liesman), this is now seen as the most likely scenario, although it is far from being a universally held view.”

As for the investment implications of QE3, the report focused on the outlook for the credit markets – rather than gold, commodities, currencies, or equities.

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