Investors have been speculating on when the third round of quantitative easing will begin since the end of QE2 in June of last year, but investors seeking an announcement this month will be disappointed. The implications of QE3 are of great magnitude, as its announcement will likely be the start of QE to infinity, when investors realize that the debt monetization will not stop. This is why the Fed will hold off as long as possible, and continuously deny the fact that this is where we are heading.
With ten-year treasury yields around 1.6%, the Fed does not need to implement a third round of QE to manipulate yields lower. The focus on the European sovereign debt crisis has given the Fed additional breathing room that will allow them to delay any further official QE announcement.
The CPI increased by 1.7% YOY in May 2012. Although the Fed's target inflation rate is 2%, the most recent rate is the first time the CPI has dropped below the Fed's target since January 2011. For the Fed to implement QE3 there would need to be a continued downtrend in the CPI. The Fed is not going to make any major policy decisions based on one month's worth of economic data. The Fed's greatest fear is deflation, which will be met with additional money printing, but the data does not currently support a true deflationary threat.
Bernanke has passed the buck to congress, urging them to do their part to help the economic recovery. It is unlikely the Fed will announce QE3 after just telling congress they need to step up the recovery efforts on the fiscal side, and get the "fiscal cliff" the U.S. is facing at the end of this year in order.
The Jobs Situation
Seasonally Adjusted Nonfarm Payroll Month-Over-Month
A continuation of the 4 month trend in declining jobs could eventually lead to QE3. However, the Fed's current view is that warm weather in the winter may have accelerated job growth, and the current slump may just be payback for the earlier bump. The Fed will need to see more data before it can make this determination, and decide if an additional round of QE is appropriate.
Although the U.S. dollar has spiked due to concerns over the European sovereign debt crisis, the dollar is not high enough to justify that the Fed take major action. The dollar index was not able to break through resistance at 83, and is currently declining. The dollar would need to break through the 83 level, and start moving towards the 2010 highs of 88 before the Fed would become excessively concerned with dollar strength.
Other Tools before QE
Before the Fed announced a third round of QE, they would most likely use other tools at their disposal, like extending Operation Twist, or additional commentary about keeping interest rates at historically low levels for an extended period of time. These actions will buy the Fed more time, and are not viewed as negatively as QE by the general public.
Whether explicitly stated or not, the Fed targets the equity markets. With the S&P already at 1,342 a third round of QE would not provide the markets with sustainable or significant upside.
Additional monetary stimulus is important for investors in the broad market like the SPDR S&P 500 (SPY), but it is particularly important for investors in precious metals like the SPDR Gold Shares (GLD), or the iShares Silver Trust (SLV). There will be additional rounds of QE, but the circumstances mentioned above make the announcement of the third round of QE in June unlikely. Precious metal investors should be prepared for a possible take-down on disappointing news that the Fed will not start QE3.