Markets Up on Expected Fed Easing

      Expectations drove the markets back yesterday and are behind today's start in the green. The question that begs is what happens if the Fed doesn't do anything.

      Part of the start in the green came from some good housing news. The news to be sure was somewhat mixed-housing starts were down in May but building permits were at their highest level in four years:

       "On the economic front, housing starts fell 4.8 percent to a seasonally adjusted rate of 708,000 units in May, according to the Commerce Department, below the Reuters poll forecasts for 720,000. But building permits surged to its highest in more than three years."

        http://www.cnbc.com/id/47873210

       The markets evidently are counting on Fed action. Goldman Sachs says it's coming.

        "The U.S. central bank will most likely ease monetary policy when it meets this week as recent data point to a worsening labor market and the crisis in Europe intensifies, Goldman Sachs said."

        "The Federal Open Market Committee will likely say it would buy assets such as mortgage-backed securities and U.S. Treasurys when it meets for a two-day meeting starting Tuesday, Jan Hatzius, the investment bank’s Chief U.S. Economist said in a report on Monday."

       “We would be quite surprised if we saw no easing this week,” Hatzius wrote in the report.

        http://www.cnbc.com/id/47868321

       Goldman also foresees that there may be more Operation Twist. The effectiveness of this has been in doubt of course. However it's believed to be significant for the expectations channel:

       "The Federal Reserve may also extend Operation Twist, he added, although he does not find the “strategy very attractive.” The program – which involves the Fed selling medium-term bonds and using the proceeds to buy longer-term ones, such as 10-year Treasurys, effectively driving down longer-term interest rates – runs out at the end of June."

      “We believe that an extension of Operation Twist could well be insufficient on its own and could thus be followed by additional easing action before long,” Hatzius said.

      "Instead, a “sufficiently large program” that involves mortgage-backed securities would help, he said, adding that while “it is unlikely to be very powerful, that doesn't mean Fed officials shouldn't do it.”

       So is the Fed going to disappoint these expectations? We'll know soon enough. If it does now would be a good time to go short in the market-if only I had cash to get in! Yes if they do ease this should bode well naturally.

      Another suggestion that would be new for the Fed:

      "In addition, the Fed could opt for unconventional means such as promising not to raise rates until the unemployment rate has fallen to a specific level and a nominal GDP level target, according to the report."

      If anything is bullish for expectations you'd think that would be.