There is a lot of talk (actually hopes and dreams) of QE3 coming soon due to the signs of a weakening economy. I’m of the opinion that the economy isn’t what the fed is trying to help. The fed (and the European Central Bank) is trying to keep financial institutions solvent and sure up confidence in financial markets. Their actions over the past 3 years have not been targeting the economy and won’t be over the next few years.
The economy is simply their justification for action. What the fed fears most is a loss of confidence that results in falling markets that destroy the balance sheets of financial institutions and even governments (can you say Greece, Italy, and Spain). While they’re standing back and watching the ECB and EU participants try to save European banks and countries, they are also implementing policies that make it easy for banks in the US to recapitalize through high earnings (ZIRP). They’re not implementing policies that help consumers…that would then strengthening the economy. So if you’re wishing and hoping and thinking and praying, planning and dreaming for QE3 don’t look for signs of a weakening economy. Look for signs of weakening European bonds and weakening of US stocks.
Take a look at the chart below and do a little math on the market sell offs and QE policy announcements and you’ll quickly see that QE3 won’t show up until at least 1200 on SPX.