The Federal Open Market Committees (FOMC) two-day meeting begins today. It will decide if it should extend Operation Twist, wherein the Fed sells short-term treasuries, and buys longer-term bonds or if it should partake in stimulus measures to boost a flagging US economy.
Geoff Lewis of JPMorgan Asset Management highly doubts that the Fed will go for a third round of quantitative easing (QE) as he believes the US economy is enjoying a slow recovery. We think GDP growth will pick-up a bit in the second half of the year to 2.5%, he says.
He doesnt think that an announcement by the Federal Reserve that they are going to implement further QE will be enough to generate a sustainable equity rally.
Below is an edited transcript of his interview. Watch the accompanying video for more.
Q: What are your expectations from the FOMC meeting? A lot of people are talking about an extension of Operation Twist. If that comes through, is it sufficient for what the market is pricing in or is the market likely to be disappointed if we just get an extension of Operation Twist and hence there might be a correction in the market?
A: I think the market would be disappointed unless there is something a bit more than Operation Twist. A lot of the Feds governors seem to be more dovish recently. What they have been saying in the financial media has raised market expectations. Whether we will see a QE3, I rather tend to doubt because after all the US economic recovery is still proceeding and the Fed would do better to keep its ammunition in reserves.
Q: Are you expecting that they will reiterate Operation Twist and just throw a hint that they stand ready to do other things like quantitative easing?
A: I do not think the case for QE as far as the US alone is concerned at this stage is particularly great. The US is enjoying a recovery. We think GDP growth will pick-up a bit in the second half of the year to 2.5%. There is clear evidence of recovery in the US residential