Fed's Lacker Not Mad, Just Disappointed

The President of the Federal Reserve of Richmond, Jeffrey Lacker, spoke on Monday, in a speech in which he lamented the sluggish pace of the U.S. economy and the grim outlook in the jobs market. "One striking observation that may be relevant to the possibility that growth underperforms for a sustained period is the apparent reluctance of many employers to add workers in the face of rising demand," Lacker said, as reported by Reuters. Interestingly, Lacker is a noted "inflation hawk" who opposed the Fed's recent $600 billion monetary stimulus known as QE2 or the second round of quantitative easing. Lacker's grim assessment could foreshadow a shift in Fed policy. Although the Fed has steadfastly denied that it would undertake a third round of quantitative easing, the fact that one of its inflation hawks is bearish on the economy may lend credence to the belief that the Fed will ultimately change its mind. On Friday, David Tepper stated that the Fed would not engage in QE3 unless there was a significant move lower in the markets. Tepper's assessment is particularly salient because of his correct call in predicting QE2. Maybe the bear threshold for initiating QE3 is less than Tepper believes. Action Items Bullish: Traders who believe that the Fed will undertake QE3 might want to consider the following trades:

• Buy SPDR Gold Trust GLD in a long play on gold. Gold rallied sharply after the implementation of QE2, and might benefit from additional quantitative easing.
• Buy ProShares Ultra Dow 30 DDM in a long play on the Dow Jones. The Fed has thus far been relatively successful in rallying the markets after QE. Another round might be bullish for the Dow.

Bearish: Traders who believe that the Fed will stay the course and not implement another QE may consider taking positions in the following:

• PowerShares DB US Dollar Bullish Index UUP is a long play on the dollar. The dollar may benefit if the Fed does not increase its balance sheet any further.
• ProShares Short Dow 30 DOG is a short play on the Dow Jones. The market may tank without further quantitative easing.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.