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How to Tell If QE3 Is Coming

Monday, 22 Aug 2011 | 9:38 AM ET
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Reading Fedspeak has never been easy, but these tips will help you weigh the odds of another round of pain for the dollar - er, quantitative easing.

Want to figure out if QE3 is in the works? You could wait to hear what Fed Chairman Ben Bernanke has to say at Jackson Hole - or you could consider these clues.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, looks for a convergence of indicators to figure out the odds of QE3. Right now, he told me, surveys of things like sentiment and consumer confidence are quite negative, but "real data like retail sales - those data are holding up better."

For Chandler to view QE3 as likely, he says, "I would want to see that survey data as lead indicators for the real sector data. I would want to see the real sector data break down. We're not seeing that yet."

Aroop Chatterjee, foreign exchange strategist at Barclays Capital, looks at long-term inflation expectations. He has compared five-year over five-year inflation expectations now and right before the beginning of QE2, and he says investors are now expecting about 2.5% inflation, compared to less than 2% before the last round of easing. Chatterjee argues that the dollar has remained weak against the euro because investors are anticipating QE3, but he says, "I think the Fed would want to see more evidence of a real slowdown in the economy" before committing to another round.

Others think QE3 could be with us already. "Holding the fed funds rate low to the middle of 2013 will require the Fed to buy quite a lot of bonds, and that is actually a de factor QE3," Diane Swonk, chief economist at Mesirow Financial, told me.

Swonk says that as recently as a few weeks ago, she would have put the odds of QE3 quite low. But the downward revision of GDP "lowered that threshold quite dramatically," she says, as did the wrangling over the debt ceiling and the euro zone's failure to resolve its issues.

You have to decide for yourself whether QE3 is in the works. But at least now you can understand the Fedspeak.

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