Classic 101 with Mike Maloney.
I think QE3 is already baked in. The Fed just won’t call it that. Here’s what I see: Instead of printing more money, the Fed is likely to start reinvesting the proceeds of maturing debt. I believe the Fed will also attempt a freeze of some sorts that effectively removes pressure from the U.S. Treasury markets that would otherwise crater it. At the same time, I can easily envision continued demand for U.S. Treasuries from abroad that will confound such well-known Treasury bears as Pacific Investment Management Co. LLC (PIMCO) star Bill Gross, who has been wrong on Treasuries before. The European euro is in real trouble – and so are the institutional investors who have parked their money there. This, in turn, means that the so-called “PIIGS” of Portugal, Italy, Ireland, Greece and Spain truly do run the barnyard – a fact that will help sustain U.S. Treasuries, as well.
As for the so-called “nuclear option” that is so popular on the late-night chat boards sponsored by card-carrying members of the tin foil hat club … don’t waste your time worrying about it. China can’t dump U.S. dollars, and neither can Japan. Nor can either country dump U.S. Treasuries en masse. The reality is that there is simply not another alternative on the planet capable of absorbing the proceeds if they did so. So both nations are effectively stuck.
The final reason that I’m sure that QE3 is a done deal is, ironically, a political one. Despite the fact that so much is wrong with this country on so many levels, the fact is that this is an election year and that means the status quo is likely to remain in place until the new guy reaches the White House. And the status quo speaks to the inevitable Federal Reserve Plan for QE3 – even though it’s in the “stealth mode” that I’m predicting.
4:25 PM EDT UPDATE: Never before have I heard The Bernank take so much time discussing individual commodities. He even mentioned wheat and the drought in Western Kansas, for crying out loud! It seems that The Chairman was taking great measures to shift the blame of commodity cost inflation to supply disruptions and global demand and away from Federal Reserve monetary policy.
Why and why now? To me, The Bernank is again trying to buy himself some time. As stated above, money must continue to be created from thin air if the U.S. Federal Government is going to continue to operate. As austerity is not forthcoming, further quantitative easing is the only possible funding solution. By shifting the blame and focus away from the weakening dollar and onto miniscule, specific events, The Bernank can continue to print money while blaming the attendant continuing rise of all dollar-denominated commodities on “transitory” events.
The Fed is not likely to bring forward monetary tightening just because commodity prices cause headline inflation to rise. Although the language on inflation was toughened slightly, the real emphasis was on the following: first, that the impact of higher oil prices on inflation would be transitory; and second that medium term inflation expectations would need to rise before the Fed would get worried. This suggests that the FOMC will tolerate a lot in this area before tightening policy.
Translation: the Fed is willing to see plenty of official inflation (which is even worse on food and energy prices) before raising interest rates. And when people directly experience serious inflation through their groceries and energy costs – they will ‘get it’ and rush to gold and silver even more.
The Fed chairman managed to give the market the impression that he is very relaxed about the weakness of the dollar, despite his routine comments about the desirability of a “strong” currency.