Fed's QE3 Is the Drug the Market Craves

The expectation now is that Fed Chairman Ben Bernanke and the central bank will follow the same script as 2010. Last year, equities sold off sharply heading into summer as economic activity weakened. The Fed at first held off from promising more quantitative easing before Bernanke made a speech in Jackson Hole, Wyo., during the Fed's annual symposium. Investors now expect a sequel one year later, with Bernanke set to address the Fed conference Aug. 26.

"The announcement, if we get one, will come around Jackson Hole later this month," Roberts says. "The markets will respond much more favorably if they aren't anticipating it. The Fed left the markets wanting a little more Tuesday afternoon. It's exactly like last year."

The benefit of a third round of quantitative easing is questionable, which may help explain the plunge in equities Wednesday. Roberts notes that the market had a sigh of relief temporarily, but he argues there will be very little impact in terms of the economy. Instead, more quantitative easing will see a smaller impact on the markets.

"In March 2009, everyone was convinced the world was going to end, so QE1 had a very big effect on the financial markets," Roberts says. "The second round of QE gave us some growth in the market but very little economic recovery at all. Each successive round of QE is having a law of diminishing return effect. You're getting less and less effect for every dollar of QE that's used. Eventually, QE will have no effect at all."

Dearborn's Nolte agrees and takes the analogy of quantitative easing as a drug further by noting the painful withdrawals that the market suffers after quantitative easing programs end. "QE1 and QE2 were artificial. When they come off -- ultimately it has to come off -- then you wind up with the pain that we're suffering with now and what we suffered with last year," he says.

Nolte adds that the quantitative-easing measures to date and any future programs will ultimately be ineffective because the Fed is not in a position where it can address the real problems of the economy.

"The QE process has not translated to better economic results because it's not fixing the problem that we have," Nolte says. "The Fed is injecting more into the banking system, not the economy. The overarching issue, both here and in Europe, is debt. The Fed can't do a damn thing about that. It has to come from the political side, and there is no will to address that."