To QE3 or not to QE3: What’s Ben thinking?

On the eve of Federal Chairman Ben Bernanke’s annual Jackson Hole speech, the markets have turned their attention to what may come out of Wyo. Although he used this outing to hint at a second round of quantitative easing (QE2) last year, a number of analysts are expecting no such development from this year’s trip.

Keith Springer, president of Springer Financial Advisors, says he expects Bernanke to reiterate the Fed’s “wait and see, but ready to act” rhetoric. He points to a number of factors for this conclusion with prominence given to the recent uptick in some economic indicators and the active dissent by some FOMC members. “The market is addicted to the stimulus, but the Feds is going to have to let our ‘free market’ economy go free sooner or later. It truly is caught between a rock and a hard place,” he says. If the Fed holds off on any more stimulus, Expecting that Bernanke will not announce further easing, Springer says it will be difficult to predict the market’s reaction. “The market could look at this either way: Upset at no more stimulus or happy that things are not bad enough to need more. I said simple, not easy.”

Lance Roberts, CEO at Streettalk Advisors, agrees that Bernanke is likely to continue the wait and see rhetoric but says he may leave breadcrumbs about possible stimulus down the road. “They’re likely going to say, ‘The economy’s weaker than we originally anticipated; we’re concerned about that and watching it very close. We have policy tools available.’ They will drop those hints and see how the markets react to those breadcrumbs,” he says. Roberts goes on to say that the Fed is caught between a couple different problems because if it comes in to do more straight quantitative easing, then longer-dated interest rates will rise and commodity prices will go up, creating more inflation. Roberts says he expects Bernanke will not announce further easing tomorrow, but will lay the groundwork for possible easing in the future. “The markets are dying for any type of news about the stimulus. They’re almost like addicts. If there’s any type of news or breadcrumbs from the Fed tomorrow strongly hinting at any sort of QE program, then we should get a market rally tomorrow,” he says. “If they’re very vague about it or put it off, we’ll have a strong selloff.”

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