To QE3 or Not to QE3, That is the Fed's Question

Equities Editors Desk  |

With Germany granting the go-ahead for the ECB's unlimited bond-buying program today, market expectations that the Federal Open Market Committee will unveil a third round of quantitative easing have helped push stocks to levels investors haven't seen since 2008.

Most of Wall Street didn't expect much from the recent Jackson Hole meeting, anticipating that the Fed would wait on more economic data to signal whether the economy need additional help for growth. Supporters of more easing got the economic softness that they wanted with unemployment remaining above 8 percent.

Regardless of whether QE3 will have a long-lasting economic impact for the U.S., the market wants what it wants. As evidence of this, investor excitement around the possibility of QE3 has actually been a very significant driver of the market's performance over the summer months. Lee Adler of Wall Street Examiner writes:

The Fed will continue to talk the talk, but not walk the walk. If the players are convinced that more QE is coming they will front run it and buy stocks, which is the Fed’s desired effect. There are plenty of excess reserves that the banks and can use as a base to extend the margin to fund these speculative buys. This is called “synthetic QE,” which is when the Fed gets the effects of QE by jawboning, without actually conducting operations.

But has Chairman Bernanke reached a point now where he must deliver on a major stimulus plan? Or does he still have more room to walk the fine line and string the market along a bit further?

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