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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.

QE3 and Election 2012

Bernanke cannot be seen as having any impact on the presidential election in November.

The Federal Reserve claims that politics plays no role in its decisions, but that is just silly.

There are transcripts of President Richard Nixon pressuring Federal Reserve Chairman Arthur Burns to cut interest rates before the 1972 elections, according to an article in Journal of Economic Perspectives.

In a recent interview with the Boston Globe, Boston Federal Reserve President Eric Rosengren suggested that others at the central bank are holding back from needed action on the economy due to the election.

He is correct.

Rosengren, who wants the Federal Reserve to have an open-ended capacity to buy U.S. Treasury bonds, stated that, "We don't get to pick the timing of the global slowdown."

Cornelius Hurley, a former Federal Reserve counsel now at Boston University Law School, noted that while officials do consider the political impact, they do "whatever they think is right."

That is more plausible as the effects of the policies of the Federal Reserve on the political landscape of the United States are profound.

With the recent U.S. jobs report delivering disappointing numbers (130,000 new ones were expected, only 96,000 delivered), there is much more pressure on the Federal Reserve to initiate QE3. At his August 2012 Jackson Hole speech Bernanke promised nothing specific, but articulated the overall Fed position to stimulate the economy "as needed."

This led one analyst to term it "QE Forever."

The European version of "QE Forever" was recently announced by European Central Bank (ECB) President Mario Draghi. That statement sent the Dow Jones Industrial Average higher by 244.52 points.

When Bernanke does announce QE3, look for a market surge to follow. Anytime there has been an event that called for QE3 or suggested it might be coming, the Dow has soared.

As the central bankers have been working together with the Federal Reserve engaging in swaps and other measures to recapitalize the European financial system, Draghi's remarks can be viewed as a pre-announcement of QE3 in the United States.

But that might not be before Nov. 6.

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