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Did Fed Get QE3 — Without Doing QE3?

Why we rallied: did the Fed get QE3 without doing QE3?

The market initially didn't care for the Fed statement because there was no real catnip: no explicit reference to a third round of quantitative easing (Treasury purchases), no cut in the rate on excess reserve balances, no extended duration of Treasury portfolios, none of the little things traders were discussing.

And extending the Fed funds rates "at least through mid-2013" is further acknowledgement that conditions are likely to remain weak for some time.

But that simple statement caused a stunning collapse in Treasury yields— essentially creating the same conditions as QE3: Treasury yields down, the dollar down, Fed signals it's not worried about inflation...can you say, "asset inflation?"

With that said, there was no reason for the 10-year yield to collapse, and I would anticipate that to moderate tomorrow.

Still, if rates stay lower, a couple of things become compelling:

1) the yield differential between Treasurys and the S&P 500, as well as higher-paying dividend stocks, becomes more favorable for stocks;

2) On the other hand, the dramatic drop in interest rates — with even the 10-year dropping to 2.17 percent (!), will provide a bit of catnip to the home refinance market — and maybe even the purchase market.

One mortgage broker in Philadelphia told me that 30-year mortgages he is pricing today at 4.375 percent (no points) will likely go to 4.125 percent tomorrow. Fifteen year mortgages priced today at 3.5 percent will likely go to 3.25 to 3.375 percent.

Also: the Fed has "punted" stimulus discussion right into the arms of congress and the president. Expect more talk of repatriation of foreign corporate profits in exchange for job creation, and extending the payroll tax holiday. I asked Bill Gross of Pimco what the President should do — he said the President should stay in Washington in August and call the Congress back into session.

What's it all mean? This was one of the toughest Fed statements to parse that I have ever seen. It took traders an hour to decide that stocks should be bought. The initial read was negative because of the sour economic outlook. You can certainly be pessimistic: "Welcome to Japan," trader Scott Redler messaged me. "Slow growth for extended periods of time- range bound- limited opportunities."

But look at the reaction late-day, and some traders are looking for at least short-term trading opportunities.

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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