It is my belief that QE2 weakened the dollar causing a spike in commodity prices and that spike has ended. The one commodity which is “in a class by itself” is gold. Gold is not a consumable. Its value has been gaining because the perception is that the value of fiat currencies is weakening.
We have Bernanke indicting the possibility of QE3 during congressional testimony today. The fact is that the Fed must assess the consequences of whatever fiscal policy changes come out of the budget debate. It would appear that whatever happens (less spending or higher taxes) will hurt GDP and the Fed may try to make up that gap by increasing the monetary base with a third round of quantitative easing (QE).
Bernanke keeps bringing up the possibility of deflation as the reason for another QE. QE causes inflation of commodity and energy prices and that hurts the middle class.
Bernanke’s words, while not clearly indicating there will be QE3, are translating into higher equity and lower bond prices. Short-term thinking is apparently the order of the day. The Fed should consider reducing or eliminating the payment on excess reserves parked at the Fed. This payment encourages monetary inertia. Today’s economic data below.
-Purchase Index – Week/Week: -2.6%
-Refinance Index – Week/Week: -6.2%
-Composite Index – Week/Week: -5.1%
-The housing market is still soft
Export Prices – Month/Month: +0.1%
Export Prices – Year/Year: +9.9%
Import Prices – Month/Month: -0.5%
Import Prices – Year/Year: +13.6%