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Jonathan Yates
Is it Time to Start Preparing for the End of Quantitative Easing 3?

Quantitative Easing 3 cannot go on forever.

Eventually the Federal Reserve must stop this policy of buying trillions worth of Treasury bonds and mortgage-backed securities to help finance the US budget deficit and keep interest rates low.  There has been no doubt that the liquidity created from this and other quantitative easing measures around the globe by other central bankers has sent the equity markets much higher.  Just the thought the Quantitative Easing 3 might be ending took the Dow Jones Industrial Average much lower last week, before it rebounded on assurances from Federal Reserve Chairman Ben Bernanke that the program would continue.

But the Federal budget deficit in the United States has fallen.  In addition, there is more of a demand for Treasury bonds.  Not enough to finance the budget deficit to keep interest rates so low, but better than it has been.

As the chart below shows, gold (NYSE: GLD) has been falling as the US Dollar has been rising (NYSE: UUP).

That has been due to the US Treasury market being the only one with enough depth to absorb all the liquidity being created.  But when Quantitative Easing 3 is ended, it will be a different matter.  Interest rates could rise, which would drive down stocks for utilities and others that fall when rates are higher.

As the chart below shows, consumer confidence is now high and rebounding with the market.  It is the best rating since February 2008, right before the onslaught of The Great Recession.  Former Federal Reserve Chairman Paul Volcker used to say that it was the job of the central banker to take away the punch bowl as the party was just starting to rock.  With consumer confidence so high again, it might be time for the central banker to step in and cool the economy down.  That would be very easily accomplished by Bernanke with the pulling back of Quantitative Easing 3.


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