Yesterday the FOMC minutes led to considerable speculation that the FED might already bring QE3 to the table at its September meeting.
I believe that in spite of the minutes, the probability of this happening is lower than it seems. Unless the stock market tanks before the meeting, that is.
I have two reasons for my beliefs:
The first, is that the FED has only ever done QE in response to a stock market crisis
No crisis, no response. QE1 was during 2008's November Crash. QE 1.5 was announced at the market lows during March 2009. QE2 was announced at Jackson Hole during the 2010 summer swoon. Never has a QE been announced when the stock market was already strong.
The second, is that the minutes refer to a time when the market was different from now
The minutes were from the FOMC meeting which ended August 1. At that point, the market had recovered somewhat from previous weakness, but had not broken out yet and volatility was high.
Today the market stands at recovery highs and has broken out. It's a different market, with a huge drop in volatility and some clear signs of speculation to boot. It's not a market into which the FED will likely do any QE, especially with real time numbers such as the jobless claims indicating some recovery in the job market.
The stock market's - S&P 500, Nasdaq 100 - positive reaction and the dollar's negative reaction seem to have been influenced by something which in all likelihood won't happen unless the stock market and the dollar actually head the other way.