QE3 Will Not Be Like QE2
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With economic data illustrating the deteriorating U.S. economy, talk about QE3 is growing.
The talk of such an endeavor from the Federal Reserve is nothing new and has been discussed before QE2 was even over. However, with Fed heads discussing such a move and the Jackson Hole meeting fast approaching, speculation will only heat up further.
For those that don't remember, the 2010 Jackson Hole meeting was the event where Ben Bernanke first discussed the Fed's $600 bond buying program, which later became known as QE2. This year's Jackson Hole meeting is August 26 - 28.
While there is hope in the market that Bernanke & Co. will juice the market with another $x billion bond buying plan, QE3 may look entirely different.
In recent public comments, Mr. Bernanke has suggested that the future effectiveness of buying treasuries willy-nilly may not be the best bet. No, Bernanke's next foray could also involve placing caps on Treasuries.
If rate caps are used, the Fed could signal to the market the yield on various Treasury securities along the curve. The market would likely move toward these "capped" yields. If not the Fed will buy whatever is necessary to get them there. The Fed used this tactic successfully in the decade prior to 1951.
If yield caps don't work, Bernanke could take the risky measure of messing around in the forex market. The Fed could buy foreign government debt or domestic government debt. The Fed could also go direct and buy equities.
The talk of such an endeavor from the Federal Reserve is nothing new and has been discussed before QE2 was even over. However, with Fed heads discussing such a move and the Jackson Hole meeting fast approaching, speculation will only heat up further.
For those that don't remember, the 2010 Jackson Hole meeting was the event where Ben Bernanke first discussed the Fed's $600 bond buying program, which later became known as QE2. This year's Jackson Hole meeting is August 26 - 28.
While there is hope in the market that Bernanke & Co. will juice the market with another $x billion bond buying plan, QE3 may look entirely different.
In recent public comments, Mr. Bernanke has suggested that the future effectiveness of buying treasuries willy-nilly may not be the best bet. No, Bernanke's next foray could also involve placing caps on Treasuries.
If rate caps are used, the Fed could signal to the market the yield on various Treasury securities along the curve. The market would likely move toward these "capped" yields. If not the Fed will buy whatever is necessary to get them there. The Fed used this tactic successfully in the decade prior to 1951.
If yield caps don't work, Bernanke could take the risky measure of messing around in the forex market. The Fed could buy foreign government debt or domestic government debt. The Fed could also go direct and buy equities.
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