Markets Unlikely to Be Pleased With Fed Action?

       The consensus seems to be more Operation Twist but not QE3. The reason the Fed may prefer Operation Twist is that it's less controversial-it doesn't expand the Fed balance sheet.

       The rub is that by being less controversial it's less likely to have any impact as rates are already very low. OT is largely seen as having a limited effect now and an extension is seen as having an even more limited effect.

       A few months ago, prior to the current slowdown of the recovery compliments of Europe, the many if the Fed seemed to be leaning towards no action unless the economy is clearly taking a turn for the worst.

       So are we at this point now? We've seen unemployment tick up and job gains tick down-with in May only 69,000 net jobs created.

       The markets have been rising the last week but that's in anticipation of a Fed move of some sort. So hopefully the Fed understands the markets expect something. If they simply come out and say they stand ready to do something in the future if things get worse this will probably be taken badly by the markets which clearly need something.

      The median economic forecaster seems to see just the extension of OT though as we saw the median forecaster is also pessimistic about what it does.

      Deutsche Bank expresses this median view:

       "Our view for Wednesday’s FOMC statement is that at best we will get a soft Twist – smaller duration takeout, but not QE3. We think the Fed should be more aggressive, but Fed language does not suggest that they are there yet."

      http://blogs.wsj.com/marketbeat/2012/06/20/marketbeat-mind-meld-drink-in-the-collective-wall-street-wisdom/

      Godlman Sachs sounds a little more bullish:

       "Our confidence that the FOMC will ease policy once more at the June 19-20 meeting has also grown. At a time when Fed officials are far short of their dual mandate of maximum employment and 2% inflation, financial conditions should be accommodative and GDP growth should be well above trend in order to re-employ displaced workers and avoid a gradual transformation of cyclical into structural unemployment."

      Yet what comes out more in both forecasts is that the markets want more out of the Fed. OT is seen as most likely but more is wanted. JP Morgan sums up the sentiment:

      "We continue to expect the Fed to push out its rate guidance and extend Operation Twist, but with risky assets already priced to aggressive QE expectations, post-FOMC market moves are likely to depend on the extent to which the Fed disappoints relative to these expectations."

      The implications of this are worrying-that the market has already priced in aggressive QE expectations and that the move after the FOMC will be based on how far the Fed disappoints this expectation.

     If I weren't broke myself I'd be tempted to play this move. Which way do you go-long or short? It depends on how well you anticipate what the Fed will do. The worst case scenario is the Fed does nothing-but promises at some indeterminate time way in the future if "things get bad enough" to do something-how bad do they have to do before you send out the fire trucks? At some point you are too late. If that's the message I'd go short. What the Fed should do if they're smart is for once try to beat market expectations rather than chase them.

     This would mean being aggressive for once-QE3 or maybe promising not to tighten until 5.6% unemployment or something. If the past is nay guide it doesn't seem good. The Fed always seems to be running behind, though not as far behind as Europe. About the only consolation.