QE3 ON THE WAY?

According to Barclays and a report from Bloomberg, investors are expecting another $500B round of QE.  Bloomberg reports:

Record-low yields on U.S. Treasuries show traders expect Federal Reserve Chairman Ben S. Bernanke to signal as soon as this week that the central bank will begin a third round of asset purchases to boost the economy, a scenario the world’s biggest bond dealers said is unlikely.

Barclays Plc said 10-year yields indicate traders have priced in $500 billion to $600 billion of Treasury purchases by the Fed. Citigroup Inc. said current rates can only be justified by more central bank bond buying or assuming the economy will shrink by 2 percent.

“The market is pricing in another round of large-scale asset purchases, looking for confirmation possibly as early as the Jackson Hole symposium” in Wyoming this week, Anshul Pradhan, a fixed-income research analyst at Barclays in New York, said in an interview last week. “The probability of that is low. If the Chairman does disappoint, then there should be a reversal in the outperformance of 10-year notes.”

I personally think this is incorrect.  The bond market is no pricing in QE3.  It is pricing in expectations of absolutely stagnant economic growth.  If we were pricing in QE3 I think we’d be seeing confirmation in other markets such as commodities and equities.  That’s clearly not happening.

At this point, I think it’s abundantly clear that QE2 didn’t do much for the US economy.  You almost have to have been asleep over the last year to conclude that more QE is now going to save the day.  As I said before it even started, QE2 was a monetary non-event.  QE3 will almost certainly be more of the same unless Bernanke substantially alters the form in which it is implemented.

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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