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qe3 explained

  • Featured Story

    Peter Schiff: Thanks to QE3, We're All Screwed

    By , Associate Editor, Money Morning • @DavidGZeiler -

    U.S. Federal Reserve policies like QE3 are building up to an inflationary catastrophe, says economic expert Peter Schiff.

    Schiff, the CEO and Chief Global Strategist of Euro Pacific Capital, made his remarks about the dire consequences of excessive quantitative easing in a video interview on Yahoo! Finance's Breakout.

    Schiff said he has dubbed the Fed's third round of bond-buying, known as QE3, "Operation Screw" because "everybody's pretty much screwed if they own dollars."

    He warned that the Fed can only continue its policies of buying U.S. Treasuries and mortgages by printing more money, and printing more money inevitably will drive much higher inflation.

    "The Fed is now promising to print $85 billion a month," Schiff said. "That's over a trillion dollars a year. And I think that's just their opening bid."

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Article Index

Peter Schiff: Thanks to QE3, We're All Screwed

By , Associate Editor, Money Morning • @DavidGZeiler -

U.S. Federal Reserve policies like QE3 are building up to an inflationary catastrophe, says economic expert Peter Schiff.

Schiff, the CEO and Chief Global Strategist of Euro Pacific Capital, made his remarks about the dire consequences of excessive quantitative easing in a video interview on Yahoo! Finance's Breakout.

Schiff said he has dubbed the Fed's third round of bond-buying, known as QE3, "Operation Screw" because "everybody's pretty much screwed if they own dollars."

He warned that the Fed can only continue its policies of buying U.S. Treasuries and mortgages by printing more money, and printing more money inevitably will drive much higher inflation.

"The Fed is now promising to print $85 billion a month," Schiff said. "That's over a trillion dollars a year. And I think that's just their opening bid."

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How to Play the QE3 Rally

By , Money Morning -

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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How to Profit from QE3 When the Fed Pulls the Trigger

By , Money Morning -

In one form or another, the U.S. Federal Reserve soon will introduce a third round of quantitative easing (QE3) or a related major economic stimulus program.

A statement from the most recent Federal Open Market Committee (FOMC) meeting of the Federal Reserve reported that, "Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery."

President of the Boston Federal Reserve, Eric Rosengren, called for an open-ended program to allow for the Federal Reserve to buy bonds like it did during Quantitative Easing 2. He pointed to the high unemployment rate as the main reason more stimulus is necessary.

"That calls for a more substantive action than we've taken to date," he said. "We need a pro-growth monetary policy," adding that the current state of the economy is "not sufficient."

Federal Reserve Chairman Ben Bernanke announced Quantitative Easing 2 at the August 2010 Jackson Hole economic policy summit. It consisted of the central bank buying $700 billion in U.S. Treasury bonds to finance the U.S. budget deficit.

Rosengren now wants the Federal Reserve to have an unlimited authority in that area, held in check only by the reaction of market forces.

Those market forces reacted very strongly to QE2, forcing the U.S. dollar down in value while prices for commodities such as oil, grains, gold and silver soared.

In addition to the commodities price rise, select stocks performed well during QE2 as consumers spent more and emerging markets enjoyed a heavy growth period. These are the companies investors should buy ahead of QE3, which is on its way.

How to Profit from QE3

The most important factor to consider when hunting for stocks to buy ahead of QE3 is a robust dividend framework.

With the Fed keeping interest rates low as it tries to repair the U.S. economy, dividend yield is crucial.

Or, as Money Morning Global Investing Strategist Martin Hutchinson put it, "In Ben Bernanke's rotten world, a few select high-yield investments are practically a necessity these days."

According to investing legend Jack Bogle, founder of the Vanguard Group of mutual funds and creator of the first mutual fund, dividend income has provided more than 40% of the historic total return of a stock.

Besides money in your pocket, dividends represent a commitment of the management to return capital to investors. Dividend income also proves that the company is sound enough to reward its shareholders without hindering the future growth prospects of the business operations.

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Today's FOMC Meeting: We Could Wait Four More Months for Action

By , Money Morning -

The U.S. Federal Reserve continued its wait-and-see stance today (Wednesday) and remained in idle mode when it said and did little at the conclusion of its two-day Federal Open Market Committee (FOMC) meeting.

The central bank decided to leave rates unchanged, reiterated it would leave rates low through at least 2014 (not extending them to 2015 as expected) and did not announce a third round of quantitative easing.

The Fed chiefs did, however, voice that should conditions warrant, they are ready to step in and take aggressive steps to bolster the U.S. economy.

PIMCO's leader Bill Gross told CNBC that "a changing in policy landscape can be expected in a month or so."

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QE3 is on Its Way - Here's How to Prepare

By , Money Morning -

Federal Reserve Chairman Ben Bernanke spoke to the U.S. Senate Tuesday and yesterday (Wednesday) in his two-day biannual meeting with Congress - and failed to make any promise to institute more stimulus measures.

He did leave the door open for the Fed to do something - even if it won't commit to what that will be.

The markets rallied, although investors were disappointed that the Fed chief couldn't deliver a bigger commitment.

But make no mistake - quantitative easing, or QE3, is coming.

That is assured for one simple reason.

The U.S. government can find few buyers for its debt at current low interest rates. And as Bernanke has stated publicly, low interest rates will remain in place until at least 2014.

That means the Fed will have to continue its role of financing the budget deficit of the U.S. government through the inflation of its balance sheet.



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The Fed's Mixed Messages on QE3

By , Money Morning -

Federal Reserve Chairman Ben Bernanke, speaking before the Joint Economic Committee Thursday morning, refused to hint at whether or not investors can expect another round of stimulus - either in QE3 or Operation Twist - to help the struggling U.S. economy.

Rep. Kevin Brady, R-TX, asked Bernanke to "look the market in the eye" and tell investors what to expect from the Fed. Bernanke refused to commit to a policy, but said the Fed could deliver an answer in the next couple of weeks.

Bernanke's comments indicated that the Fed would continue to monitor the U.S. economy as needed, but that no action like another round of quantitative easing was immediately necessary.

"The Committee reviews the size and composition of its securities holdings regularly and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery," Bernanke said in prepared remarks.

His non-committal comments contrasted those made a day before by other Fed members, including Vice Chair Janet Yellen and San Francisco Fed President John Williams, who indicated that more stimulus by the central bank is necessary to boost the U.S. economy.

"It may well be appropriate to insure against adverse shocks that could push the economy into territory where a self-reinforcing downward spiral of economic weakness would be difficult to arrest," Yellen said Wednesday in a speech in Boston.

Also on Wednesday Federal Reserve Bank of Atlanta President Dennis Lockhart said another round of Operation Twist could be considered.

"There is capacity to do more," Lockhart in a speech in Florida. "It is certainly an option. I'm not going to speculate on what the FOMC will do."

Bernanke's remarks followed the market's best daily performance of 2012. The Dow surged 287 points on Wednesday, closing at 12,414.79. Despite the mixed Fed messages, markets started off well Thursday, with each index rising more than 1% after The Peoples Bank of China announced it would cut its deposit and lending rates 0.25%, marking its first cut since 2008.

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