Fed QE3? No, But More Support
QE3 — a third round of quantitative easing? No, but still support. Several comments from Mr. Bernanke made traders believe that the Fed would continue to provide some support to stock prices, even after QE2 ends.
Mr. Bernanke indicated that Fed policy would stay on hold for an extended period — that means rates not going up any time soon. He suggested this "extended period" would last at least "for the next couple of meetings" but most traders believe it will be well after that.
As for the worry the Fed would simply stop buying Treasurys, that is also not going to happen. Mr. Bernanke made it clear the Fed will continue to reinvest maturing securities, both Treasurys and MBS, so the amount of securities they hold will remain relatively constant. In other words, the Fed's balance sheet will not expand, but it will not contract either, and since the expansion of the balance sheet is believed to be a major factor in the rise in stock prices, maintaining the status quo does offer some reassurance.
At some point, letting the balance sheet shrink would amount to a tightening of policy, but that does not seem imminent.
In other words, not QE3, but not throw out the balance sheet with the bath water.
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