QE3
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How to Play the QE3 Rally
QE3 was finally announced by the U.S. Federal Reserve after today's Federal Open Market Committee (FOMC) meeting.
Federal Reserve Chairman Ben Bernanke announced that the Fed will launch a new bond-buying program to purchase $40 billion in mortgage-backed securities each month. Interest rates will be kept at 0% through mid-2015, six months longer than originally planned.
Together with the rest of the remainder of the Operation Twist program, the Fed will be buying $85 billion in bonds for the rest of 2012. The new bond purchases will start tomorrow (Friday).
Bernanke and the FOMC decided in an 11-1 vote to use unconventional monetary policies once again to bring down unemployment that has been stuck above 8% for 43 months and to boost an economy that grew at a lethargic 1.7% rate in the second quarter.
But this new program, compared to previous rounds of easing, has a new twist.
QE3 is an open-ended program to buy bonds until the economy improves. The Fed said in its statement earlier today that if the labor market does not improve it will continue purchases and undertake additional measures if needed.
Now that QE3 is here, will this new measure actually boost the economy and spur job growth?
Catherine Mann, a Brandeis professor and former Federal Reserve economist doesn't think so.
"The Fed continues to want the economy to grow faster and specifically, to grow more jobs, but the ability of QE to do that is extraordinarily limited," she told CNN. "We know that QE reduced interest rates, but we also know that has not led to more construction, more mortgages, more business investment, or more lending. Since it hasn't done any of that, it probably hasn't created jobs either."
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Stock Market Today: This Stock Wins With or Without QE3
The major headlines in the stock market today include the Fed's decision to implement QE3, increased producer prices, and higher jobless claims.
- QE3 a 99% certainty?... Not quite- When the Federal Open Market Committee makes its statement at 12:30 p.m. EDT every investor will be waiting to hear if QE3 has finally arrived. After what seems like two years of speculation since QE2 was announced will we finally get QE3? According to Citigroup Inc. (NYSE: C) a gauge of indicators of market expectations for additional central bank stimulus rose to a record 99% in August. Yet many economists do not expect QE3 to be announced today for many reasons. If the Fed takes action it will be viewed as highly political coming just months before Election 2012. Even if the Fed announces QE3 but says it will delay QE3 purchases until after the election as it did with QE2, the political implications will still be there. Other reasons are the lack of progress the previous rounds of QE have had in turning around the economy - and not just the stock market. "The Fed continues to want the economy to grow faster and specifically, to grow more jobs, but the ability of QE to do that is extraordinarily limited," Catherine Mann, a finance professor at Brandeis and former Federal Reserve economist told CNN. "We know that QE reduced interest rates, but we also know that has not led to more construction, more mortgages, more business investment, or more lending. Since it hasn't done any of that, it probably hasn't created jobs either."
- Producer prices rise most in three years- Wholesale prices, measured by the producer price index, climbed 1.7% in August - the most since June 2009 - due to higher gasoline and natural gas prices. This was a faster increase than the 0.3% reported in July and ahead of the median forecast for a gain of 1.3%. Food prices rose 0.9% due to a rise in dairy and egg prices. The core producer price index which excludes food and energy rose 0.2%, which was in line with expectations. Tomorrow's consumer price index will be a good indicator if higher wholesale prices have translated into increased consumer prices.
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One Reason the Fed Meeting Today Might Not End in QE3
Dismal economic reports for the United States have recently made the stock market rise - not the expected reaction.
That is due to traders anticipating that a third round of quantitative easing (QE3) or a similar measure will be coming to stimulate the American economy.
Yet, despite unemployment rising in the United States and growth falling, no major economic stimulus programs along the lines of QE3 have yet been announced by Federal Reserve Chairman Ben Bernanke at any Fed meeting.
The timing of QE2 explains why.
QE2 was a program where the Federal Reserve inflated its balance sheet to purchase about $700 billion in U.S. Treasury bonds to finance the federal budget deficit. This unprecedented act was required as few other investors, either foreign or domestic, were buying U.S. Treasury bonds at the prevailing interest rates.
Without this action, the low interest rate environment promised by Bernanke until at least 2014 and imperative for the recovery of the United States economy, particularly the real estate sector, would have been untenable.
The Federal Reserve as a result became the "buyer of last resort" for U.S. Treasury bonds.
QE2 was announced by Bernanke at the Jackson Hole economic policy summit in August 2010. However, the Fed's bond buying did not start until after the mid-term elections in November 2010. QE2 ended in June 2011.
That is why QE3 has neither been announced nor initiated.
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Fed Meeting Today: Are You Ready for QE3?
Investors have prepared for the Federal Open Market Committee (FOMC) meeting today and tomorrow to end with the announcement of a third round of quantitative easing (QE3) - and that's a good bet to make.
Today's Fed meeting will likely end with more of the same information we've been hearing for months from U.S. Federal Reserve Chairman Ben Bernanke. It's been a year and a half since Bernanke first announced that short-term interest rates would remain near zero "for an extended period." That language will likely stay the same tomorrow, and the policy timelines could be drawn out even longer.
There is also no doubt that QE3 or some other meaningful economic stimulus measure is on its way.
Maury Harris, an analyst with UBS, declared in a recent note to clients that, "We now anticipate an announcement of another round of quantitative easing at the FOMC meeting on September 13th. We expect the easing will take the form of a six-month program of at least $500 billion, primarily focused on Treasuries."
Harris also added that, "We also expect the FOMC extends their rate guidance into 2015."
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Could QE3 Really Do Less for the Economy Than the iPhone 5?
Investors are eagerly waiting to hear if U.S. Federal Reserve Chairman Ben Bernanke will announce QE3 this week. Bernanke speaks Thursday at the conclusion of the two-day Federal Open Market Committee (FOMC) meeting and many expect him to announce some form of stimulus to revive the struggling U.S. economy.
But there's another huge event scheduled this week, one that could provide a tool other than printing money for boosting U.S. gross domestic product (GDP).
Believe it or not, analysts at JPMorgan Chase & Co. (NSYE: JPM) estimate that the Apple iPhone 5, expected to be unveiled tomorrow (Wednesday) afternoon and on sale by the end of this month, will raise GDP by 0.5% in the fourth quarter of this year.
Money Morning Chief Investment Strategist Keith Fitz-Gerald appeared on Fox Business' "Varney & Co." program Tuesday morning to discuss the possibility of this iPhone effect and what it implies.
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QE3: Get Ahead of the Fed
The U.S. Federal Reserve has consistently pointed to high unemployment as a reason to deliver more stimulus, which makes this week a perfect time to announce quantitative easing, or QE3.
The Federal Open Market Committee (FOMC) meeting this week is fresh off Friday's Labor Department report that nonfarm payrolls increased by 96,000 jobs last month. Economists were hoping to see an increase of 125,000 jobs.
Unemployment fell to 8.1% from 8.3% as 368,000 people dropped out of the labor force.
The employment numbers were depressing - but for investors this was always a win-win situation.
If the jobs number had blown past 125,000 that would have been good for the markets - but so is a number that missed the mark.
That's because from whichever angle the Fed and Chairman Ben Bernanke look at this, the report is more fuel for the QE3 fire.
"This weak employment report, in jobs, wages, hours worked and participation is probably the last piece the Fed needs before launching another round of quantitative easing next week," Joseph Trevisani, chief market strategist at Worldwide Markets in Woodcliff Lake, NJ told Reuters last week.
Unemployment fell even though fewer jobs were added because the labor participation rate dropped to 63.5%, its lowest level in 30 years. The amount of underemployed and unemployed people is now above 25 million and the U-6 rate, the broad total unemployment rate which many consider to be a more accurate gauge of unemployment, stands at 14.7%.
With the rally the markets had last Thursday after the European Central Bank announced its new bond-buying plan, expect the markets to continue their bullish trend when Bernanke takes action.
That means now's the time for investors to prepare to profit from QE3.
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QE3 Risks: Why this Harvard Economist Fears More Stimulus
High U.S. unemployment and slowing economic growth have stoked hopes of a third round of quantitative easing, or QE3, from the U.S. Federal Reserve. Fed Chairman Ben Bernanke hinted that more was on the way - although failed to indicate when - in a speech Friday at the Jackson Hole, WY, economic symposium.
Bernanke repeated the Fed's recent stance that current economic conditions are still "obviously far from satisfactory" and more help would be coming "as needed."
Interest rates remain near zero, but the Fed maintains that it still has plenty of ammo in its arsenal to boost the economy. The Fed apparently doesn't want to do too little now while the economy faces high unemployment and some inflationary pressure.
On the other hand, doing too much could - if Fed policies interfere with Congress' ability to act down the road -lead to a backlash against the Fed's power.
And the farther the Fed goes with monetary stimulus measures, the deeper that problem becomes.
That's why Harvard economist Martin Feldstein is afraid of QE3. He thinks adding to the billions of dollars already committed to quantitative easing programs will hurt us more than it helps.
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QE3 Still on Table, Bernanke Says in Jackson Hole Speech
The Federal Reserve is looking at more action to prop up the lagging U.S. economy, including a third round of quantitative easing (QE3), Fed Chairman Ben Bernanke said in a speech today (Friday).
Much of the speech, delivered at the Fed's annual retreat at Jackson Hole, WY, made a case for the effectiveness of the central bank's easy-money policies since 2007, including "nontraditional" actions such as QE1, QE2, and Operation Twist.
The Fed chairman said that the stimulus purchases "have provided meaningful support to the economic recovery while mitigating deflationary risks."
And in a hint to expect more of the same -- namely, QE3 -- Bernanke said that the costs of such policies, "appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant."
Bernanke also voiced concern over the sluggish economic recovery, and in particular the "painfully slow" improvement of the U.S. unemployment rate, which has changed little in 2012.
That's the sort of bad economic news that has pushed the Fed to take action in the past.
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Stock Market Today: Markets See-Saw on Bernanke Speech
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Why the Jackson Hole Fed Meeting Will Look Familiar
U.S. Federal Reserve Chairman Ben Bernanke will take the podium this Friday at the economic policy summit in Jackson Hole, WY, as traders hang on every word hoping he'll deliver a clear signal of central bank action in 2012.
They have good reason to think the Jackson Hole Fed meeting can move markets. It was at this summit two years ago in August 2010 that Bernanke announced an economic stimulus program that came to be known as Quantitative Easing 2.
QE2 consisted of the Federal Reserve inflating its balance sheet to purchase $700 billion in U.S. Treasury bonds from November 2010 to June 2011. This was necessitated as no investors, either foreign or domestic, could be found to purchase U.S. Treasury bonds at such low interest rates.
Now, two years later, the U.S. economy has economic growth falling with unemployment rising. Consumer confidence is at record low levels. Lending institutions are processing millions of properties through various stages of foreclosure. Businesses are sitting on record levels of cash, preparing for the worst, rather than investing in job-creating plants, equipment and machinery.
Oil prices are also rising, which will have a negative impact on the U.S. economy. The more money sent overseas to pay for imported oil, the less there is to buy the goods and services that raise the level of employment in the United States.
This was how things were in 2010. Actually, things seem worse now since Standard & Poor's in August 2011 downgraded the credit rating of the United States.
In an attempt to change this gloomy outlook, the Federal Reserve is letting it be known that it will act again in a major way, like in did in August 2010.
But, like that year, no new policies will officially start until after Election 2012.
The Federal Reserve cannot be seen as doing anything that might influence voting when Americans go to the polls the first Tuesday in November. That is the way it was in 2010, and that is the way it will be this year.
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