Bernanke’s Newest Trick: QE3 Incognito?

Bernanke’s Newest Trick: QE3 Incognito?

With the markets in a steep downturn since the US credit downgrade announcement by S&P, many traders and investors carefully listened to the FOMC meeting in anticipation of an announcement that the Federal Reserve would interfere in the markets through credit injection. Bernanke didn’t confirm the much anticipated next round of Quantitative Easing. Instead the Fed chairman released a statement in which he admits that the economic recovery is not as strong as previously anticipated:

“Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected.  Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up.  Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.  However, business investment in equipment and software continues to expand.  Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity.  Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions.  More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks.  Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.  The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.  Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further.  However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent.  The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.  The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.  The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.  It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.”



With the FOMC meeting at 2:15pm the markets sold off rather rapidly as no announcement was made about QE3. Failing to confirm a capital injection in combination with the negative economic growth outlook resulted in new session lows for stocks. It wasn’t until the DJIA reached a session and week low of 10603 around 2:45pm that money flooded to the markets.  Within the last 75min of market activity the DJIA gained 639 pts to close at a day high of 11,242. That begs the question, where did that injection of capital come from? The President’s Working Group on Financial Markets? Or did the “policy tools” to promote price stability by any chance include the next round of Quantitative Easing unannounced?

Was that QE3 Incognito, Ben?

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This post was written by:

Jesse Livermore - who has written 99 posts on WTF Finance.


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