It is at this point that the calls for more stimulative actions are made by the media and Wall Street. The market then rallies on rumor and innuendo as expectations rise on hopes that the need for liquidity will soon be met - Point 2.
This is where we are today. Headlines, postings and tweets are filled with that hope of further accommodative action from the Fed.Read it at Pragmatic Capitalism
NO QE3 COMING, REPLAY OF 2011 TO CONTINUE
By Lance Roberts, CEO StreetTalk Advisors
When the FOMC initiated both QE2 and Operation Twist, US stocks were approaching bear market territory (down 20%) and inflation expectations were falling rapidly. Although inflation expectations have been falling (along with oil prices), stocks are up ~7% in the past two weeks and nearly 8% for the year. Meanwhile, fears regarding Europe are subsiding following the Greek election and G-20 summit (though this optimism is misplaced). Bernanke was correct in calling high headline inflation temporary, but further action at this point may once again send money pouring into the energy and commodity space. If temporary effects are encouraged to persist for long enough, it becomes foolish to continue calling them temporary.
Given the upcoming elections, strength in equity markets and moderate expected growth going forward, this would be an odd moment for the Fed to start acting pre-emptively. As noted in my Predictions for 2012, I expect “the Fed will move it’s forecasts for the first interest rate hike out to 2015.” Beyond that, the Fed may continue Operation Twist (Sterilized QE) at some small scale. Neither of these actions is likely to be significant enough to satisfy investors. Markets may have jumped the gun with the recent rally.
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Fed's Treasury Purchases Now About Asset Prices, Not Interest Rates
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