Stockpickr) -- QE3 isn't coming for investors -- at least not yet. Here's why you shouldn't care.
There's been a lot of talk about QE3, the nickname for the
Fed's next projected round of monetary easing. Put simply, it's a program where the Fed starts buying financial assets in an attempt to stimulate the economy. While the idea of QE3 was unthinkable in the first few months of 2012, it became a big buzzword again as soon as Mr. Market crapped out in April.
So what's wrong with the Fed swooping in to save stocks? For starters, that's not what the Fed cares about.
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Lots of people think that QE3 is going to come about as a reaction to poor performance in stocks, or real estate prices, or jobs numbers. But the third round of quantitative easing isn't some shot in the arm that gets administered when stock prices are struggling. Sure, Ben Bernanke does plenty of hand wringing on TV about tough stock markets when he speaks to congress or to the media, but there's only one metric that the Fed is trying to control directly with QE3: inflation.
The Fed has publicly said that it's trying to target a 2% inflation rate. But again, that's not really what's going on. Instead, they're just trying to keep inflation
that 2% low water mark. And when the inflation meter goes too low, Bernanke and company just dump a bunch of cash into the marketplace.
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For the last couple of months, since the QE3 talk reemerged, I've been watching the Fed's 5-Year Forward Inflation Rate. It's a number that basically works out the inflation rate that's being priced into the Treasury's TIPS securities, and for the last few years, it's predicted QE like clockwork.
Here's the key: Every time forward inflation dips below 2.2%, we get another round of quantitative easing.
First, it happened back in late 2008, when inflation slid below 2%. In mid-2010, the Fed caught it earlier, not letting the number dip below that 2.2% level before announcing QE2. And it happened again in September 2011, when the Fed announced Operation Twist in what was effectively a QE3-lite. Each time that number has tested 2.2%, the Fed announces a new monetary easing program.