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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  1. Woah, the market is truly delusional and addicted to funny monies.

    I think BB will let them down this time, and stocks will go to the bottom as bad data comes.

    There won’t be any QE until we are in technical recession, and even then we will see what happens and how in monetary policy used. Will they cause a shortage of government securities?

  2. Well yields can and do go negative.. Im sure China would like to lock in some nice capital gains as they go on a spending/buying spree.
    I cant see a shortage being a problem.

  3. Buying gov’t debt does not seem to be propping up the economy? Correct, it just helps a bit with alleviating the deflation pain associated with still keeping the past two bubbles as part of the GDP. To achieve nominal growth, we need more than a trillion of additional borrowing/spending, but that will not bring real growth though…

  4. 1) The markets were wrong in their assessment of REAL economic gains from QE2. So the present market dilemma may be viewed as a disappointment of the its own making. Bernanke would do well to disregard the market’s tantrums. Of course, he will not. He is a terrible trader. Now he has been hoodwinked into easing by SocGen (and other French banks) unwinding trades – first in Jan08 and again in the beginning of August.
    2) If Bernanke has realized that QE2 did not do a great deal to boost a sustainable recovery, he should abstain from more theatrics (yes, monetary policy is now little more) to further a sense of boom and bust in the minds of economic particiapants. The sense of relief from quitting a losing game is certainly worth his while and will be a respite for the rest of us who think he is just distorting incentives. Bernanke, take a sabbatical. Your best work is behind you.
    3) The government, especially the Obama admin, needs to own up to its mistakes and realize that they are the last line of defense against a long Japanese malaise. As Richard Koo points out, the solution has to be fiscal. And it starts at home, literally. Without going into a long diatribe, the admin needs to rein in the banks and forcefully restructure debts in this economy. The lack of leadership in Washington is downright scary.

  5. Exactly.

    So Cullen, you think the economy is stagnant. Is it fair to say you have not concluded we are certainly heading towards a recession?

  6. QEs are intended to do one thing only, to prevent capital losses in US equities.

    Once a QE stops the capital losses begin, as the last few weeks have shown.

    So a new QE is required.

    Of course this is a trap from which there is no painless exit.

    (Not as bad as the Euro trap though.)

  7. Can someone please explain why QE doesn’t increase the money supply and therefore inflation. I do understand that QE is merely an asset swap in which the Fed replaces banks’ treasury bonds (saving accounts) held at the fed with lower yielding reserves (checking accounts). That is why I would logically think that QE doesn’t increase the money supply. But then I came across these charts at the St. Louis Fed…
    Money supply growth visibly increases in both at exactly the time QE1 and QE2 were implemented, more so in the M1, however. Would someone care to explain this to someone who is still new to this. The asset swap explanation make sense but the raw data says otherwise. Thank you in advance

  8. The M2 components that are surging are components that would be offset by M3 data. But the Fed doesn’t produce M3 data. So there is the appearance of a surge in the money supply. Same thing happened in the M2 data after QE1 when deposits jumped. So deposits are up about $500B and small time deposits are down 60B, inst money funds down 140B, commercial paper down 50B, asset backed down 30B, and the rest is likely made up by the components they no longer report.

    This is confirmed by the Shadow Stats M3 data which is showing a marginal YoY increase: http://www.shadowstats.com/imgs/sgs-m3.gif?hl=ad&t=1313329241

    Some people will report this as a big scare of impending hyperinflation or inflation. But just like they did during QE1 and QE2, they will end up being wrong. Amazing how many times people can get the same thing wrong and just continually report it….

  9. Still Truckin, excess reserves — which is where QE ends up — are not included in M1 and M2 so by definition QE is not causing any increases in M1, M2.


    If you look at M2 is has risen linearly since 1995 except for two period. The first was in the middle of the recession and the second was now. The Fed has a breakdown of M2 but I think I have read that the increases have been due to increases in savings.

  10. You guys keep saying that the same thing over and over, but its a bunch of garage. If money printing by the Federal Reserve doesn’t increase the supply of anything, than why is the ECB “sterilising” its bond purchase program? According to you gurus, it doesn’t do anything…

  11. Inflation in Europe is 2.5%. It’s 3.5% in the USA. Core is even lower. We’ve been hearing inflationists complain about the inevitable hyperinflation now for 4 straight years. How long can they be wrong before you eventually throw in the towel?