QE 2 officially come to an end on June 30 and the Fed has signaled that it does not intend to initiate another round of QE. However, once the stock market starts a sell-off and the economy rolls over again, the Fed may find that it's painted itself into a corner.
Ben Bernanke concluded at the last FOMC meeting that economic growth has slowed down and inflation has increased. This is no news for investors who have been paying attention to economic reality and looked beyond the statements coming out of the Fed.
Bill Gross, the manager of the world’s largest bond fund, suggests that the Fed may be forced to resume quantitative easing through one form or another. It will probably use different language and not refer to it as QE 3, but the effects will be the same. He suggests that it may decide to cap long-term treasury bonds at around 2.5%, through a program of Treasury bill purchases. The effect of such an effort will be the same: Higher inflation and a weakening dollar.
Gross is certainly not alone in predicting that the Fed will intervene in the bond market. Jim Richards at Omnis also suggests that the Fed will continue quantitative easing through a stealth operation. He argues that the Fed's balance sheet has grown so large that there's a vast amount short term Treasury bills maturing every month that will be reinvested by the Fed to provide billions of dollars for bond purchases. Richards refers to this operation as QE by stealth, and the process will slowly monetize a portion of our debt by debasing the dollar.
As troubles in Europe and other parts of the world dominate the headlines, the greenback may see a temporary relief rally during the summer months, which may be enough to offset the lack of buying by the Fed. But when the economy cools down and we face economy reality again, the Fed may be forced to step into the bond market to prevent rates from rising.
The result of the Fed’s potential action will undoubtedly lead to a weakening dollar and eventually higher interest rates. To protect yourself against higher inflation and a weakening dollar, gold (GLD) and silver (SLV) have stood the test of time and are the money of choice when fiat money fails. Those who want to speculate can also short long term treasury bills, buying the ProShares Short 20+ Year Treasury (TBF).