QE3 at Last

Aug 25, 2012

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
This week we saw something we haven't seen in markets for quite some time. For much of last year, most of the financial press was talking about the US Federal Reserve and Quantitative Easing (QE). With the high volatility in markets, especially last summer, investors expected new rounds of QE to improve sentiment.

But the new rounds of QE never came. Instead, we got more of a wait and see approach, and some liquidity neutral policies from the Fed. All that has changed this week. It seems like when the market was least expecting it; the Fed announces that it is very likely to implement a new round of quantitative easing, unless there is a dramatic improvement in economic indicators.

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What makes the announcement a surprise is the fairly benign market condition that precedes it. When markets were very volatile early this year and towards the end of last year, the Fed did nothing. Now when volatility has reduced dramatically, we get news of more QE.

Naturally, as the market wasn't expecting it, it reacted in a big way to it. Most markets rose, precious metals rose, and the dollar fell. The markets have been much more volatile this week as a result.

The real question is why would the Fed announce a potential new round of QE at this time. From a global perspective, it is certainly the case that economic data has not been good. Growth remains low in the US, the Eurozone is contracting, and emerging markets are seeing falling but positive growth. Yet this alone doesn't explain the Fed's actions. We had the same situation at the beginning of the year, yet the Fed did not do anything.

It is often the case that central bank actions tend to have the most impact when no one is expecting it. If market participants are expecting central bank action, then chances are it will already be priced into the markets, and very little will result from it.

This is perhaps why the Fed chose to behave in the way it did. If the Fed is continually appeasing markets and doing what the markets want, it would not have any real power or significance. But by implementing policy when the market is not expecting it, it can have a stronger impact.

The markets have reacted strongly so far to the Fed's announcements, but there is no guarantee that QE3 is on the way. It is likely, but not a certainty. Again, this is part of what the Fed does. The Fed makes sure that the rest of us aren't sure exactly what it is going to do.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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