Expect QE3 After Geithner's Warnings

In testimony yesterday (Wednesday) before the House Financial Services Committee, U.S. Secretary of the Treasury Timothy Geithner may have inched us closer to QE3 when he warned that the U.S. economy will be slammed by two major factors: the immediate danger from the Eurozone debt crisis and fiscal cliff 2013 that is fast approaching.

"The economic recession in Europe is hurting economic growth around the world, and the ongoing financial stress is causing a general tightening of financial conditions, exacerbating the global slowdown," Geithner said in his testimony.

As much of the revenue for major U.S. corporations such as Ford Motor Co. (NYSE: F), DuPont (NYSE: DD) and Cisco Systems Inc. (Nasdaq: CSCO) comes from Europe, the damage is already being felt by both employees and shareholders. Cisco, down 20.52% for the quarter, recently announced the layoffs of 1,300 workers, about 2% of its global labor force.

Geithner cited other factors harming the U.S. economy, including the rise in oil prices earlier this year, cuts to government spending and slow rates of income growth.

Possible adverse developments in the future, particularly the fiscal cliff, led Geithner to warn that, "These potential threats underscore the need for continued progress in repairing the remaining damage from the financial crisis and enacting reforms to make the system stronger for the long run."

QE3 Hopes Move Markets

The stock market rose Wednesday as traders anticipated Geithner's testimony would encourage the Federal Reserve to initiate another round of quantitative easing, or QE3, a massive stimulus package to invigorate the anemic U.S. economy.

The Dow Jones Industrial Average ended the day up about 0.4%, 58 points, ending three days of double-digit losses.

As highlighted by Geithner's remarks before Congress, with all the momentum presently building against the U.S. economic recovery, the Fed is expected to step up. The Fed has to take action soon as Operation Twist, the program that involves selling short-term Treasuries to buy those with a longer-term maturity, is ending.

Adding weight to the speculation that QE3 is on the way was the front page of Wednesday's The Wall Street Journalthat claimed the Fed had moved closer to helping the U.S. economy. The Fed could act next week during its two-day policy meeting ending Aug. 1, or wait until September when it has more economic data to go on. The next U.S. jobs report is due Aug. 3, and the first estimate for U.S. gross domestic product in Q2 will come out Friday.

There's also increasing likelihood that Federal Reserve Chairman Ben Bernanke will introduce QE3 or a similar program when he addresses the economic policy summit at Jackson Hole at the end of August.

Bernanke used that forum in August 2010 to initiate QE2, which entailed the Federal Reserve inflating its balance sheet to purchase about $700 billion in Treasury bonds from November 2010 through June 2011.

It looks like the Fed is setting the stage for some kind of action - warming up the crowd for the main event.

Repeatedly, Federal Reserve officials have utilized speeches, meetings with Congress and interviews with the press to establish, without a doubt, that the current state of the United States economy is unacceptable. There are many, many weapons in the arsenal of the Federal Reserve to stimulate the U.S. economy, which is needed for the global marketplace to grow.

None have worked.

Whatever Bernanke does introduce, it will not go into effect until after the elections in November, just like QE2. There is no way he can be viewed as doing anything that would even remotely influence the voting on Nov. 6 of this year.

But get ready; a QE3 announcement is in the works.

Related Articles and News:

• Money Morning:
  What is the "Fiscal Cliff"?

• Money Morning:
  Fiscal Cliff 2013: How Investors Can Prepare

• Money Morning:
  Fiscal Cliff 2013: IMF Warns of Global Impact

• The Wall Street Journal:
  Fed Moves Closer to Action