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Hoping the third time is the charm, the U.S. Federal Reserve voted on Sept. 13 to launch another bond-buying program, QE3.
Equity and commodity markets cheered the Fed's move. Stocks rallied and analysts raised precious metals price forecasts.
QE3 differs from the first two rounds in that it is an aggressive open-ended purchase program of $40 billion per month of mortgage-backed securities. The buying is slated to continue until we reach substantial and sustained improvement in the U.S. economy, which won't be a short-term achievement.
The program aims to lower long-term interest rates, stoke consumer demand and bring down the elevated unemployment rate.
But some opponents think the latest stimulus measure from Fed Chairman Ben Bernanke will fail to achieve any of that.
In fact, the QE3 doubters have a lot to say – and anyone with money in the markets right now should pay attention to what could happen.
What's at Stake with QE3
Among the QE3 opponents is Charles Plosser, president of the Philadelphia Fed Bank.
Plosser said Tuesday in a speech to financial trade groups in Philadelphia that the purchases "are unlikely to be effective in the current environment." He added that "the frictions and structural adjustments" that are hindering progress in labor markets cannot be fixed by monetary policy.
Likewise, the Fed's impact on business spending and hiring is limited, as is its effectiveness in enticing households to open up their wallets. Companies are anxious about the looming fiscal cliff, and families are attempting to shore up their savings in anticipation of Taxmageddon, so what the Fed can actually do is quite constricted, Plosser continued.
Also nervous over inflation, Plosser said the Fed must guard against a loss of its inflation-fighting reliability. Plosser stressed the Fed is likely to need to raise short-term interest rates "well before" the current guidance of mid-2015 to keep from causing greater prospects of higher inflation.
Markets tumbled following Plosser's remarks as doubts spread about QE3's effectiveness.
As one of the leading Fed foes who has opposed Fed Chief Ben Bernanke's unusual monetary policy, Plosser's comments were not a great surprise. But they did cast a shadow over the belief that Bernanke's policies have the full blessing of his Fed contemporaries.
Plosser's views mirror Richmond Fed Bank President Jeffrey Lacker who dissented for the sixth consecutive month at the September Federal Open Market Committee (FOMC) meeting. Lacker opposed additional asset purchases, opposed the FOMC's June decision to extend Operation Twist through the end of the year, and supports an interest rate increase in 2013.
Inflation hawk Dallas Fed President Richard Fisher said he would have voted against the policy if he were a voting member of this year's FOMC.
Also wary over QE3 is James Bullard, president of the St. Louis Fed. He believes the Fed should have waited for clearer signs of a waning economy before launching its fresh bond-buying program.
"We should take a little bit more (of a) wait-and-see posture," he told Reuters in mid-September.
The state of the U.S. economy did not warrant such a move, Bullard noted, adding that financial stress is fairly low and inflation measures on are target.
"I would have voted against it based on the timing. I didn't feel like we had a good enough case to make a major move at this juncture," Bullard said.
What worries Bullard is the long-term effects of QE3 and the risk of future inflation. He backs a controversial proposal by congressional Republicans for the Fed to return to having just one mandate: preventing inflation.
Currently, the Fed has a double focus on full employment and stable prices.
Bullard's views may well prove troublesome for Bernanke as well as he becomes a voting member in 2013.
QE3 and Inflation
The loose monetary policy of QE3 has sparked a great deal of controversy among several economists who see the move as a signal that policymakers are willing to tolerate higher inflation and the inefficiencies and uncertainties inflation creates.
Any reprieve from QE3, they maintain, will be temporary.
And eventually, the Fed will have to implement an exit plan. The way-out, Plosser notes, has become even more complex and dicey by QE3.
The Dow Jones Industrial Average soared nearly 300 points immediately after the Fed announced QE3.
But another stimulus-induced rally, despite its short-term profit potential, has some dangerous consequences for investors.
In fact, our Global Investing Strategist Martin Hutchinson has detailed the effect of the Fed's QE programs on the market's value – and it's not a pretty picture.
"The effectiveness of QE and other stimulus at pumping up equities is diminishing fast," said Hutchinson. "For instance, QE2 expended 50% more stimulus cash for every point it raised the Dow, compared to QE1. And The Fed's "Operation Twist" is costing even more per market point than did QE2. I fully expect this next round of stimulus from the Fed to do even less."
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