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The U.S. Federal Reserve Plan For QE3 – And Why It's a Done Deal

When U.S. central bank policymakers conclude their two-day meeting today (Wednesday), there's really only one question investors want an answer to: What's the U.S. Federal Reserve plan for QE3?

Let me answer that for you: QE3 is a done deal – although Fed Chairman Ben Bernanke & Co. might well give it another name.

Let me explain …

$2.3 Trillion … And Counting

Since December 2008, when a worldwide credit crisis threatened to take down the global financial system, the U.S. Federal Reserve has had a starring role. It has held the benchmark Federal Funds rate at historic lows between zero and 0.25% to keep the U.S. economy from stalling. And it's pumped more than $2.3 trillion into the American financial system, mostly by purchasing securities on the open market.

The key to these asset purchases has been two "quantitative easing" plans. The second of the two, known as "QE2," was a $600 billion initiative that was rolled out in November. It's supposed to wind down when the second quarter ends next week – which is what the Fed promised at the end of its last FOMC meeting in late April.

When the Fed's policymaking Federal Open Market Committee (FOMC) meeting breaks up at around noon today, pundits are expecting Team Bernanke to announce that it's holding rates steady, and is winding down QE2 as promised.

But I'm just not buying this.

You see, there's a reason there's so much interest in the Federal Reserve plan for QE2 – and for its plan for the much-talked-about QE3: At some point, the Bernanke-led Fed will be forced to halt this epic stimulus initiative. And that could ignite an inflationary firestorm not seen in this country in decades – if ever. That will turn the Fed's mandate of maintaining "price stability" into a bad joke.

But, even worse, it could tip the U.S. economy into a double-dip recession, ignite widespread layoffs and drive unemployment skyward, and hammer this country's standard of living – especially in households that didn't prepare for this eventuality.

So when Bernanke takes the podium for his press conference this afternoon (his second so far this year – the only two, in fact, ever held by a sitting Fed chairman), this one question is likely to be the first one that gets asked: "Mr. Bernanke, will you, or won't you, bring on QE3?

After all, the stimulus propped up the global financial markets once before, so why won't it work again … or so goes the reasoning.

You can certainly understand the intense interest in this element of the current Federal Reserve plan for the American economy.

Here at home, U.S. stocks just concluded a six-week losing streak, and now face the so-called "summer doldrums." The American housing market seems to be getting worse. And inflationary pressures are building even as the U.S. economy appears to be slowing down – forcing investors to face the possibility that we'll see a double-dip recession that's infected with a virulent case of stagflation.

The overseas outlook isn't that much better. In the near term, the potential for a Greek debt default seems to soar one day and plummet the next and there seems to be a general belief that it's going to happen – the only question being when. And there are long-term issues, too, including the so-called "death" of nuclear power, which promises to cause energy prices to spike in the years to come.

So what about QE3?

Given this complicated backdrop, I think it's already baked in. The Fed just won't call it that. And I think they'll play a bit with the timing.

The Federal Reserve Plan for QE3

Here's what I see: Instead of printing more money, the Fed is likely to start reinvesting the proceeds of maturing debt. Ultimately, that won't reduce our government's bloated, toxic balance sheet. But it will change the makeup of that balance sheet – and not for the better.

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 we're heading into 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.

[Editor's Note: For a related story that details how the U.S. Federal Reserve's actions will further stoke U.S. inflation that appears elsewhere in Money Morning, please click here.]

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at

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  1. James Clark | June 22, 2011

    Love your work keep it up

  2. abdullah | June 22, 2011

    thanks for your inputs, however can you explain how would reinvesting the proceeds of maturing debt work? and how would it impact equity markets?

  3. Alison | June 22, 2011

    OK, forgive me if I seem a bit confused but, since when is 2011 an election year? Did I go to sleep last night in 2011 and wake up in 2012. Please tell me Obama Did Not Win the election!

  4. Imants Krauze | June 22, 2011

    Thanks for the insight, keep up the good work. Impeach Obama and fire Bernanke. The USA will survive with leadership from Senators like Jim DeMint. God Bless America.

  5. Imants Krauze | June 22, 2011

    Explain how to partner in silver and gold for us middle class people with limited cash.

  6. DaveR | June 22, 2011

    Thanks for another good article. I expect Bernanke to continue to dilute the value of the dollar just as he has been doing, likely utilizing the "reinvestment" tool you described. Dumping money into the system appears to be the only method and tool Bernanke knows. Also note that he was re-appointed by Obama who wants to be re-elected so he can finish the job of fundamentally changing America.

  7. Chuck Cheeser | June 22, 2011

    How utterly unoriginal Keith. I guess the internet has sprung thousands of you guys that just plagerise each others writings. I long for the days of original thought and integrity.

  8. Bob | June 22, 2011

    I suspect that the real force behind QE2 is Treasury Sec Geithner giving Bernanke his marching orders. The hope was that a lower dollar would stimulate exports and lower unemployment. However, QE2 has not worked to accomplish this. It has fueled speculation in the financial markets and undermined international confidence in the US $. Given that QE2 has not worked and a QE3 would eliminate all confidence in the US $, the question remains how stupid Geithner and Bernanke would be to contemplate a QE3?

  9. BRUCE BREIMON | June 22, 2011

    This so called recovery is a fraud. Billions of printed dollars flooding the economy, in the form of QE1 and QE2, to prop up this failed economic model. You can't have an economy that is 90% service and expect it to be viiable .
    First this economy was supported by easy credit {public debt} now ,after that ran its course, it's being supported by government debt. If we do get a QE3, soon we will need a QE4 etc.

    Think if this was a manufacturing economy. After an investement of 2.3 trillion , if this was a manufacturing economy , this economy would be soraring. Instead what has happened ? 2.3 trillion dollars flooding this economy and what do we have?
    Hardly a ripple and talk of a double dip recession. So everybody went shopping and we thought it was a recovery.
    I agree with this author. With the elections coming up in 2012 there will be a QE3 whatever they decide to call it.
    As Laurence Welk would say " Wonerful, a wonerful, start the bubble machine".

  10. Thomas Clark | June 22, 2011

    The US has been at this for a long time now (i.e., playing with the numbers, the Press and the Public). Their tools and approaches are not working. I see lots of closed stores and shuttered Businesses plus HIGH unemployment. This too was predicted in 1999 when in Silicon Valley 'out-sourcing' was a hot item on the agenda. Well, we have been outsourced. Now we must wait for lots of 'insourcing'. It is NOT going to happen Folks! It is a competitive World these days.

  11. Brian | June 22, 2011

    This is not an election year. 2012 is!

  12. Alistair Sinclair | June 22, 2011

    Excellent article Keith, THIS one is much more interesting than subjective 'socially responsible' funds. I hope you will send out alerts or updates on what you think is happening with this issue … from this administration a stealth QE3 sounds about par for the course.

    Also, your perspectives on Japan are really interesting as I have family there south of Tokyo, and your appearances on cable I really enjoy … although it must be maddening to have to listen to the twaddle of some those panels of **experts**?

  13. BH | June 22, 2011

    An alternate theory is that they postpone QE3, waiting for the economy to tank. Then they can use the economic downturn to justify it. At this point, support for more "funny money given to banks" is limited. Ben doesn't like the fact that so many commentators are doubting the real value and power of QE1 and QE2. He wants us to believe that he is in control. A little collateral damage to the economy for the good of the bankers is not something he would loose sleep over.

    So we get QE3, but delayed for a few months.

  14. Read it properly... | June 22, 2011

    Alison & Brian,

    Keith writes "the fact is that we're heading into an election year "

    i.e, an election year is coming… meaning – next year!

  15. JJK | June 23, 2011

    He said heading into an election year!
    Which we will be soon…
    You can't wait until November 2012 to prime the pump!
    Give Keith a break…
    It's just his perspective!
    Ha Ha

  16. Walter Weidner | June 23, 2011

    Let's keep it simple. A nation is like a family. If the family owes more than it has assets than the family is bankrupt. All the stimulus billions won't offer any solution to the unemployment problem.
    Unless the general public of the US and Canada will turn their backs on cheaply made and less costly merchandise, manufacturing in North America will not improve significantly. If people are unemployed they won't be able to purchase items. they won't pay any taxes either. As long as any State keeps spending more than what it takes in, there is no hope for improvement.

  17. john page | June 23, 2011

    No one else can absorb the money? So what if China offers every to buy every piece of real estate in america in cash at twice the value? Or if they drive the price of gold up to 40,000 dollars an ounce?

  18. JJ | June 23, 2011

    You are the one wearing a "tin foil hat". Do you not even see that you've cooked up your own conspiracy theory?

  19. PAUL LEO FASO | June 23, 2011

    The time has long past for the nation to throw off this tyranny. Are we expected to write more useless comments on the carnage left by the Federal Reserve Bank and the monumental theft of our Treasury for nearly 100 years?

    It is now or never.

  20. todd | June 23, 2011

    QE is nothing more than fattening up banks and wall street. None of the QE's have trickled down to main street. My guess is QE is only designed to bail out finance and banking elite and leave the bill with the poor taxpayer. Screw QE, the FED, the bankers, and any acting Congress and President who allows this nonsense to be foisted upon the American people. Let them fail. Hey rich people, why dont you work another job and pick yourselves up by the bootstraps and stop raping me and my future? You lazy swine. I hope you get what you deserve in the end.

  21. Rocco | June 23, 2011

    Excellent article Keith. Very insightful.

  22. William Harden | June 26, 2011

    We are definitely in trouble. We need a leader, or a candidate, lay it on the table for us the way Churchill did in 1940 when Hitler threatened. How did he say it? "I have nothing to offer you but blood, toil, tears and sweat. But we will never fall." How about it Ron Paul or Paul Ryan? You two guys are more aware of this problem than anyone else. Somebody step up to the plate and give it a go. Even if you don't clinch the nomination, others will be influenced. The American people deserve it.

    • DD | November 18, 2011

      Churchill was a drunk and a liar and why does the American people deserve anything? It was Churchill's lies and deceit (just like the Boy Bush lies) that kept WWII going a lot longer than it ever should have. Why don't the people of Darfur or Rwanda, Sudan etc., etc. deserve anything? Greed and the lack of integrity got the US in the position it’s in today, so this is not a deserving country. I won't go into how much the UJS exploits other countries around the world – such hypocrisy!

  23. Chip | August 4, 2011

    Good idea in theory, but I hardly see how the Queen Elizabeth 3 oceanliner is going to save our economy from a catastrophic collapse.
    Still; points for trying.

  24. greg e | September 12, 2011

    My question (fear) is: What if the "New Guy" doesn't show up? Short everything?

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