Another reason investors have cause to think Bernanke will raise the possibility of QE3 is that he first mentioned QE2 at the same Jackson Hole event, an annual Federal Reserve symposium, last year.
The Fed launched QE2 last November and concluded it this past June. The move helped push markets higher for eight months.
“We believe Bernanke’s Jackson Hole speech will include a detailed discussion of the potential for more easing through large-scale asset purchases,” Goldman Sachs Group Inc. (NYSE:GS) economist Zach Pandl wrote in a note. “A variety of indicators suggest many investors already expect more QE.”
Voices of Dissent
Of course, not everyone believes Bernanke will give the market what it craves.
“Bernanke is not planning any new policy pronouncements at the annual Jackson Hole gathering, but he will reassure markets the Fed stands ready to continue deploying what is left of its tools to bolster recovery should recession risks increase,” according to a Medley Global Advisors note to clients.
“While markets believe the language change clearly opens the door to another round of quantitative easing, the threshold for initiating fresh Treasury purchases – so-called QE3 – remains far higher than markets realize,” the Medley report said.
In fact, even if Bernanke believes another round of quantitative easing is warranted, he’ll run into several points of resistance that he didn’t face last year:
- Internal Dissent: At the Aug. 9 meeting of the policy-setting Federal Open Market Committee (FOMC), three of the 10 board members voted against the decision to hold interest rates at their current low levels through June of 2013 — the most dissent within the FOMC in 20 years. That group would strongly object to QE3.
- Conservative Climate: The recent debt-ceiling debate resulted in a bias in Washington against further stimulus spending of any kind. Although the FOMC operates independently of Congress, it would be reluctant to stir up that hornet’s nest by voting for QE3.
- Inflation: Last year inflation was hovering around a 1.2% annual rate – so low the Fed actually feared deflation was a possibility. But inflation now is running at a more worrisome 3.6%, with many blaming QE1 and QE2 as the primary culprits.
- Balance Sheet: After the first two rounds of quantitative easing and the purchase of mortgage-backed securities, the Fed’s balance sheet already stands at a bloated $2.8 trillion.
- Trade Partners: The Fed’s policies of low interest rates and easing have reduced the dollar’s value against most foreign currencies, which has made U.S. exports cheaper and foreign imports more expensive. That’s been good for U.S. companies but has angered many trade partners, particularly Brazil, who would see further bond purchases as part of a currency war.
More Harm Than Good?
All that may explain why economists, unlike investors, are unenthusiastic about the possibility of QE3. A majority of economists surveyed by CNNMoney – 12 out of 16 – said they believed the Fed should not take further action despite worsening economic news.
“It’s premature, and the potential costs exceed by a wide margin the possible benefits,” Patrick O’Keefe, director of economic research for accounting firm J.H. Cohn, told CNNMoney. He said further Fed action “would be equivalent to serving ice cream cake as the main entree at a weight loss clinic.”
And given that the economy has weakened in recent months, despite QE2, many wonder just how much good a third round of easing would do.
“Any action the Fed takes at this point may give the markets no more than a temporary lift and would not resolve the more fundamental problems that are weighing on the economy,” Deutsche Bank AG (NYSE:DB) chief economist Peter Hoopersaid in a research note.
Some observers speculate that Bernanke could attempt to satisfy the markets with some other policy options, such as promising to buy maturing notes, or even reviving an idea from the President John F. Kennedy era, “Operation Twist.”
That policy, named for the famous Chubby Checker song, flattens the yield curve by selling shorter-term notes and using the proceeds to buy longer-term Treasuries.
But despite the mood among investors that Bernanke needs to do something to spark the economy – QE3 or otherwise – the Fed has exhausted most of its options.
So the markets should get a pat on the head today – but no QE3 lollipop.
“He will explain what the Fed has done and the costs and benefits of its remaining policy options,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. (NYSE:JPM), said in a research note. “But we would expect him to leave it at that, and not forcefully signal that a given course of action has already been decided upon.”
Related: SPDR Gold ETF (NYSE:GLD), iShares Silver Trust (NYSE:SLV), iShares Barclays 20+ Year Treasury ETF (NYSE:TLT), ProShares UltraShort 20+ Year Treasury ETF (NYSE:TBT).
Written By David Zeiler From Money Morning
We’re in the midst of the greatest investing boom in almost 60 years. And rest assured – this boom is not about to end anytime soon. You see, the flattening of the world continues to spawn new markets worth trillions of dollars; new customers that measure in the billions; an insatiable global demand for basic resources that’s growing exponentially ; and a technological revolution even in the most distant markets on the planet. And Money Morning is here to help investors profit handsomely on this seismic shift in the global economy. In fact, we believe this is where the only real fortunes will be made in the months and years to come.