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QE 3 isn't about more liquidity. There's more than enough around. Thirty year mortgage rates hover around 3.5%. Banks are hoarding cash. They're sitting on over $1.5 trillion in reserves. Corporations have around $2 trillion. Interest rates can't go much lower.
At issue are economic risk and inflation. Monetary policy alone can't help. The more freely it's applied, the less effective it gets, and if too much, soaring prices defeat it.
At the same time, fiscal cliff trouble next year looms. So are three straight negative ISM reads, dangerously high unemployment, and overall economic conditions heading south.
Coordinated central bank intervention is in play. It includes Bank of England's unconventional "funding for lending." The ECB promised open-ended sovereign debt buying up to three years duration provided governments request it and accept stiff austerity conditions. Now there's QE 3. Expect the Bank of Japan to have its say.
Together with Operation Twist, the Fed plans buying $85 billion through yearend and open-ended QE thereafter. If it buys mortgage backed securities long enough, it may end up owning them all, and then what?
Anything goes is policy. The Fed said it'll "undertake additional asset purchases and employ other tools as appropriate until such improvement is achieved in the context of price stability."
Call the latter alone a giant X factor. The more money printed, the greater the inflation risk. It's already shows. At the same time, expect no more from QE 3 than earlier easing rounds. It's almost like firing a gun with blanks.
It's an added reminder of how bad things are, and suggests the Fed in panic mode. Its most radical ever policies for over four years haven't worked. Expect no change this time.
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