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TheStreet Open House

What Janet Yellen Doesn't Want You to Know About QE5

Stock quotes in this article: SPY, QQQ

BALTIMORE (Stockpickr) -- Think you know what the new Fed boss is up to these days? Think again.

In fact, even as investors feel all hunky dory about stocks again, the Fed looks closer to another round of quantitative easing than it's been anytime in the last year. And it could be a good thing for stock investors.

Let me explain.

This month, brand new Federal Reserve Chairwoman Janet Yellen dropped a "bombshell" on Congress: Even if unemployment does fall below the previously stated 6.5% threshold in 2014, the Fed still wouldn't ease up on its zero-interest-rate policy.

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Yup, it was a real bombshell all right. Oh, and did you hear that Ben Bernanke is starting to lose his hair? That's the caliber of surprise that Yellen's announcement should have been to Wall Street. None at all.

That's because the Fed's interest rate and QE efforts have nothing to do with jobs, GDP growth, stock prices, or any of the other metrics that everyone's focusing on right now. There's just one metric that matters when it comes to stimulus money: inflation.

More specifically, the Fed is targeting a pretty narrow definition of inflation: a 2.2% minimum in the Feds 5-Year Forward Inflation Rate (Note: Thats also 0.2% higher than the Feds stated 2% target for inflation.)

Take a look at how well that 2.2% level acted as signal to open the floodgates on another round of QE to date:

Every time the Fed's inflation gauge has dipped below 2.2%, the Fed has launched a major stimulus program. Put a different way, the chart above has never crossed the 2.2% mark without the Fed immediately announcing a far-reaching QE initiative. In my view, that makes the chart above pretty important to investors.

It also reveals an interesting fact about where the Fed's mind is right now. In 2012, Bernanke and company got more aggressive with stimulus money, launching QE3 and QE4 well before inflation reached its "critical" level. But that makes sense. After all, each of the first three rounds were a stop gap designed to keep the economy from the perils of deflation. With QE3 and QE4, the Fed was giving the economy a shot in the arm, hoping to jumpstart an uptrend in inflation before it got to that precarious point.

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The taper is an experiment. Yellen's Fed wants to see if inflation can stay above the white line even if they publicly give the buying a rest. But the initial reaction isn't promising. Since the taper started, five-year forward inflation has been dropping like a rock, pushing to the lowest levels we've seen since the start of 2013.

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