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'Open Ended' QE Coming from the Fed?
Pinnacle Digest writes: Chris Ciovacco believes there is no doubt that central bankers (particularly the Fed and ECB) are moving closer to another round of money printing.
The ECB is believed to be close to announcing the possibility of capping bond yields. If implemented, this will be a huge game changer. And not to be outdone, there are rumors that the Fed could implement what is known as ‘open ended QE’. This means that the Fed could commit to another round of QE without setting a limit on an amount or timeframe. We see this as a very strategic move if Bernanke pulls the trigger. If he goes through with the rumored plan, it shows he learned a huge lesson from previous rounds of QE. The previous two rounds of QE had great short-term effects on the market and economy, but once the scheduled conclusion (set by the Fed) approached, sentiment turned negative once again. However, if investors and the private sector do not know when this potential next round of QE will finish, and how much will be committed, positive sentiment could last a lot longer. While transparency is what people and congress want from the Fed, the stock market adage of ‘buy on mystery and sell on history’ could help save the market and Bernanke’s job.
This could be a market turning point if the Fed implements another round of QE using this rumored strategy. Chris Ciovacco stated “Before you decide ‘QE will have no impact or Jackson Hole doesn’t matter’, it may be helpful to understand how QE works in the real world. As we described in a series of quantitative easing videos, QE puts freshly printed money in the hands of the Fed’s Primary Dealers, which includes Barclays Capital, Goldman Sachs, and Morgan Stanley.” Ciovacco went on to state that “the fresh cash can also find its way into the brokerage accounts of primary dealer clients. Therefore, QE has a clearly defined path for the new greenbacks to make their way into the real economy.”
Reuters noted the following on open-ended QE:
“Because it would have no set limit other than the supply of Treasury or mortgage securities available, this method could eventually lead to very aggressive action, particularly if it is tied to an economic target - such as bringing the nation’s 8.3 percent jobless rate down beneath, say, 7 percent.”
It is our belief that if Bernanke does in fact implement this ‘open-ended’ form of QE, the markets and commodities (particularly the S&P and gold) could see a 20% spike within 6 months.
We will be watching the outcome of the Fed’s latest meeting intently.
Click here to read Chris Ciovacco’s take on the potential for this monumental action by the Fed.