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Could There Really Be a QE3?

Ben Bernanke
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Ben Bernanke

With weak jobs and housing data piling up, economists and currency investors are starting to ask if Bernanke will deliver another injection of economic growth hormone.

It's been a long, cold spring for dollar investors. Low U.S. interest rates brought on by the current second round of quantitative easing, or QE2, have been a key factor weighing on the greenback, particularly as other countries have started tightening monetary policy. Understandably, traders have been waiting breathlessly for the end of QE2. But as disappointing jobs numbers follow dismal housing reports, economists and currency experts are starting to ask the once unthinkable.

Could there really be a QE3?

Yes, says Simon Maughn of MF Capital.

He told CNBC that falling bond yields mean only one thing - economic weakness - and the Federal Reserve will likely feel compelled to respond. "QE3 is coming," he said. "The bond markets are all smarter than us, and that's what the bond market is telling me." (You can watch the discussion in the videoclip.)

Greg Anderson, a currency analyst at Citigroup, said some investors are bracing for another round of easing. Anderson says the fact that stocks are holding up better than bond yields is telling: the last time that happened in a sustained way was last fall, when markets were pricing in the current round of easing - and among other things, the dollar was weakening.

"Although we are far from the extreme dollar weakness of late April, the pace of weakening during the past week is noteworthy," Anderson wrote in a research note. "It certainly supports the notion that foreign-exchange markets are beginning to price in QE3."

However, Anderson told me, "I think it would take a negative GDP print for at least one quarter for Bernanke to be able to get the FOMC to back QE3," so he thinks the likelihood of another round of easing is low.

Other experts fully expect the current round of quantitative easing to be the last. Michael Feroli, an economist at JPMorgan Chase, argues that there would just be too much political fallout from any additional easing, and called such a possibility "very, very unlikely" in a note to clients.

There are trades to be made here, clearly. You just have to decide what you expect to happen. It's crystal ball time.

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