The headline sounds rather dramatic and it is intentionally so. This week we will find out: the Fed’s basic intentions about quantitative easing (QE2), and whether we will have a divided Congress.
Here are the implications of these events:
1. QE2 will either be big, small, or tentative. It involves the unemployment situation (those numbers will be released on Friday). My guess is that the initial goal will be “tentative” in that they will vote for QE, set a maximum target, say $75 -$100 billion a month, and see how it goes. As I’ve discussed, the Fed really doesn’t know what the outcome of this will be. The implications to us are inflation: either “target” price inflation or high price inflation, depending on what they do. The “target” has been 2+%. By “high” I mean anything above 5% YoY. In the 1970s it was 12+%.
This depends in large part what the unemployment numbers will be. I believe the Fed will know what Friday’s numbers will be at their meeting on November 2-3. We will find out on Friday, but if the Fed announces a QE goal of $500 billion, then we’ll know the numbers are still bad.
2. The election will be a major test for the country and the two parties. While many people feel that legislative gridlock is not a good thing, I think the benefits outweigh the negatives. I don’t have a lot of faith in the Republicans doing the right thing. I think the major positive will be that the Democratic progressive legislative agenda will be halted. Whether or not the Republicans can and will reverse some of the previous legislation related to Obamacare, Dodd-Frank, and various taxation initiatives, is to be seen. If nothing else, it will moderate the course of the country. This is a complex topic.
Every pundit I read in the blogosphere is talking about these things. So, I won’t be a talking head and say what I think will happen in politics. Let’s see and then I’ll talk.