Thursday, September 1, 2011

QE-3 would start by Sept 21, 2011----by Shan Saeed

Get ready for QE3 to enter in the global financial market soon.

Minutes from the Federal Reserve Open Market Committee's most recent meeting shows that the monetary authority will likely roll out a third round of quantitative easing by Sept. 21, the day its next meeting concludes. The Fed has already launched two rounds of quantitative easing, known widely as QE1 and QE2. Both QE1/2 were disaster for the economy as they failed to stimulate the economy and bring confidence back in the consumers

QE1 saw the Fed buy $1.7 trillion in assets from banks, mainly mortgage-backed securities, while QE2 saw the central bank snap up $600 billion of Treasury bonds.

The aim of such measures is designed to pump banks full of money so they'll investment and fuel more sustained economic growth, although the economy remains stuck in the doldrums. While critics says such policy weakens the dollar and pressures inflation rates upward, some say Fed Chairman Ben Bernanke is ready to roll out some sort of easing in order to avoid recession which is certain now. Read Aug 24, 2011 New York times titled: "US May Back Refinance Plan for Mortgage By Shaila Dewan & Louise Story

Go back a week to an article in the New York Times. The guts of this story is that the Administration is working on a plan to ReFi residential mortgages on a massive scale.

When I first read this, I ignored it. The scope of the proposal was too large. There was also a fatal flaw. The thinking was that the jumbo ReFi would be made available to only those who had a mortgage that ended up with either Fannie or Freddie. I ask the question, "What about those poor odds and sods who have a mortgage with a community bank?" Do they get nothing while those who owe F/F big bucks get a break? Where is the fairness in that result?

But every day since the NYT story, I have heard the rumblings about some deal being done. It has already impacted MBS spreads. It's back in the news today with an article in the Wall Street Journal. I have to believe that where there is smoke, there is probably some fire.

Besides buying bonds, Fed easing could call for an extension of maturities of assets on the Fed's balance sheet. I believe the minutes lend themselves to my view that there is a somewhat better-than-even chance the Fed takes action at the next meeting to increase the average maturity of assets on their balance sheet.

Some Fed officials won't rule out further easing. Depending on future economic data QE3 is one choice, but US economy needs to gather information about how the economy will perform in the second half of the year.

Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK.

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