Tags: Early | Fed | QE | Bernanke

Financial Adviser: Bernanke Won’t Announce QE on Friday

By    |   Tuesday, 28 Aug 2012 11:00 AM

The Fed will disappoint markets on Friday by not announcing a third round of quantitative easing (QE), predicts financial adviser John Early, writing for Seeking Alpha.

Stocks and gold will probably drop, while the dollar and bond prices might increase, says Early, a registered investment advisor.

Early lists three reasons why there will be no QE3: the Fed's Operation Twist, its plan to sell short-term bonds and purchase long-term bonds, is still continuing; monetary and inflation conditions that prompted QE in the past no longer exist; and future risks of easing are larger than potential short-term gains.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

Fed Chairman Ben Bernanke wrote recently that Operation Twist is still in the very early phases of impacting the economy, Early notes.

The Fed's QE programs have never overlapped, he points out. In fact, there were months between QE1, QE2 and Operation Twist. Chances are the Fed will wait a few months next year before announcing its next step, since Operation Twist is set to run to the end of 2012.

The current inflation trend and the growth in the money supply, as measured by M2, do not warrant QE3, Early argues. As long as deflation is not a concern, the core inflation rate is over 1 percent and the growth in M2 is over 4 percent, QE3 is highly unlikely.

"In the last year, M2 has grown at 8 percent, which is above the optimal range and risks significant inflation in the future. The core rate of inflation at 2.2 percent is slightly above the Fed's target."

The Fed, he adds, tripled the money supply to avoid deflation, which is several times worse than inflation, over the last few years, creating the risk of future inflation.

Most economists and investors participating in a CNNMoney survey believe the Fed will not announce QE3. Ninety-three percent of investors say there will be no QE3, and 77 percent of economists predict none.

Although rates are already low, banks are not increasing lending because of tight lending requirements, experts say.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

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