QE3 unlikely but not impossible

In my opinion, the Bernank was coy in his Jackson Hole speech. He staunchly, right or wrong, defended the Federal Reserve's previous efforts to boost the flagging economy. He defended his past efforts without any clear indication for further action, but instead left the door open for an increase in the Fed's balance sheet.

Now you can listen to my opinion, your opinion, our some other person's opinion of the chances of the Fed enacting another round of monetary easing, but the market appears to be telegraphing that the Fed will move At the very least least traders either think the Fed will move or are positioning themselves out of positions ahead of the disappointment.

I still believe the Fed will be on hold in September, but also think the probability that Bernanke eases is higher than previously anticipated. I base this opinion on the model of money supply and the stock market, which is increasing at a 13-week annualized rate over 10% now.

I think this model implies that the Fed will be on hold. And yes, one could argue that the stock market has been anticipating QE3, as it did with QE2, leading to the increase in the annualized rate.. However, the difference this time around versus in the period preceding  QE2 is that money supply growth is accelerating, increasing at a nearly 8% rate currently with a 13-week average of 3.8%. These figures compare to a 2.2% annualized increase and 13-week average of just 0.5%, as of Sept 27, 2010, just before QE2. In addition, the measures decline back in May and June was never deep, at least in my opinion, enough to warrant a full-out quantitative easing program, at least when compared to the declines in 2008 and 2010. All that notwithstanding, the Federal Reserve and traders may be more focused on the jobs number and the unemployment rate. If the employment figures come in on the low side, this will increase the chances of QE3.