Why the Fed is Waiting to Announce QE3

Having pumped the financial system with liquidity for over two years, Ben Bernanke has now decided to take his foot off the pedal temporarily. Indeed, the Fed is not only NOT launching QE 3 soon, but is going to let QE2 end.

Why is this?

It's really quite simple. QE2 primarily did two things:

• Push the stock market higher
• Gun oil and commodity prices through the roof

The Fed wants #1. The only problem is that #2 is making its money pumps even MORE unpopular with the US populace. Even mainstream financial media outlets like the Wall Street Journal have begun criticizing if not slamming the Fed's policies.

So before the Fed can continue to bail out its buddies on Wall Street, it needs some serious justification for more QE. And what better than a market Crash?

After all, the Euro crisis and market collapse in May 2010 was what laid the groundwork for the Fed's QE lite and QE2 programs. A similar drop in stocks today would give the Fed a clear "see what happens when there's no Fed help?" angle to take when it begins discussing QE3.

Indeed, if stocks were to drop off a cliff, they'd drag commodities down with them. This would take some of the inflationary heat off of consumers, which would allow the Fed to continue its BS "inflation is transitory" mantra and pave the way for QE3.

Understand, I am absolutely certain we'll see QE3 in the future. But the Fed first needs justification for it. And a market collapse would be perfect.

Again a collapse in stocks would:

• Let the Fed claim that QE is needed to keep stocks up.
• Take down commodity prices thereby letting the Fed claim inflation is falling
• Give the Fed justification for QE3 from an economic and asset price standpoint

We may in fact be seeing the first hint of a drop in stocks today with the precious metals sector getting slammed and the US Dollar rallying. This is precisely what happened before the stock collapses of 2008 and 2010.

It is clear, plain as day that inflation has arrived in the US and that it will be getting worse in the coming months. However, the markets never move straight up or straight down. And some of the price increases we've seen in commodities are quite extreme: Silver up over 70% in six months, Oil up nearly 50%, etc.

While ultimately its own entity, the Federal Reserve IS a political institution. True, they pretty much do whatever they want… but only to a certain degree. The Fed can't just unleash $500 Oil in six months without causing full-scale rioting. And money printing and interest rates don't do much as defense against angry mobs.

So with political heat turning up due to price increases, not to mention we're approaching an election year, the Fed needed to step back for a bit. This is why they didn't announced QE3 yet and why they're letting QE2 end: they want to keep some powder dry to pump the system leading up to 2012.

Consider that Obama's legacy so far has been poor to say the least. His recent Bin Laden success has been the first bump in his poll ratings in months. And he's not going to be aggressively moving to improve his image in preparation for the 2012 elections.

Now, consider that it was Obama who reappointed Bernanke. Do you think Bernanke's going to stab the guy in the back? Not likely.

So what we're going to see is another brief round of deflation, possibly a few months in duration. That's when the Fed will announced QE3 to juice the system and try to work some positive economic data for Obama's 2012 campaign.

Yes, I know that the economic data in the US is a joke. But the vast majority of people believe this stuff, so we need to consider its impact. And it's clear Bernanke is going to try to craft some kind of economic bounce for Obama's 2012 campaign.

So, I firmly believe that we could see another round of deflation this summer. And that's when the Fed will begin to stage its next round of intervention/ stimulus: autumn 2011 going into 2012.

And that's when the US Dollar will fall off a cliff as inflation hedges explode across the board.

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Good Investing!

Graham Summers.

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