Salient to Investors:
Peter Hooper at Deutsche Bank said it’s clear the stock market is the most important transmission mechanism of monetary policy – the stock market will have to carry the load. Hooper says the Fed will stick with the bond-buying strategy through next year, and end up buying $800 billion of Treasuries and mortgage-backed securities.
Deutsche Bank expects the Fed’s asset purchases will lift stocks by 3 percent over the next two years as low yields on government bonds push investors into riskier assets, and lift home prices by 2 percent over two years, assuming the Fed maintains purchases of Treasuries and mortgage debt through 2013.
Jan Hatzius et al at Goldman Sachs estimate Fed stimulus would boost growth by as much as 0.5 percentage point over the next year.
Ward McCarthy at Jefferies said the Fed is very explicit about trying to create financial conditions to try to support the economy because it doesn’t have the Fed funds rate to use as a tool because of the zero bound.
Bank of America expects the S&P 500 to climb to 1,600 by the end of 2013.
Jim Stellakis at Technical Alpha said investors usually overweight discretionary stocks when they’re optimistic about consumer spending, but the recent underperformance of these equities signals doubt about the long-term effect of QE3.
Brian Jacobsen at Wells Fargo Advantage Funds warns of what would happen if the Fed stops trying to prop prices up higher and higher.
Richmond Fed President Jeffrey Lacker said increasing stimulus risks raising inflation without doing much to improve the outlook.
Philadelphia Fed President Charles Plosser is concerned the search for yield by investors will lead to an asset bubble.
Stephen Wood at Russell Investments says Bernanke’s reduction of interest rates to prevent equity-market declines is clearer than with Greenspan .
Allan Meltzer at Carnegie Mellon said the Fed’s targeting of specific asset classes is unprecedented, won’t help the economy and will make money for speculators.
Dana Saporta at Credit Suisse said the Fed sees asset prices as a medium objective – its ultimate objective is stable inflation and the highest sustainable employment.