Bernanke Just Hurt Chances Of Near Term QE3

Federal Reserve Chairmen Ben Bernanke just hurt the chances of a near term QE3 by saying, "We are not prepared at this point to take further action." Bernanke has said that he is not sure if a third round of QE would even work, given the potential consequences for it, such as higher inflation, which is starting to creep in. Yesterday, in his testimony, Bernanke said that the Fed would be willing to provide additional stimulus if it was needed, in light of the weakening economy. He gave options such as providing more explicit guidance about the balance sheet size, additional QE (which was mentioned on Tuesday in the FOMC minutes), and the potential for cutting interest paid on bank reserves. The Federal Reserve just finished a second round of quantitative easing, known as "QE2", buying $600 billion worth of U.S. Treasuries. Bernanke is speaking for the second day in a row in front of Congress discussing the economy, as well as the debt ceiling. Regarding the debt ceiling, Bernanke said that a debt default would destroy confidence, and that a default would be a calamitous event. Congress has been unable to reach a deal on the debt ceiling, which would be breached on August 2. Last night, Moody's Investor Services said the U.S.'s Aaa rating is on credit watch negative, as Congress is unable to get a deal done. We have seen in recent weeks bickering from both sides, Republicans and Democrats over the debt ceiling. Republicans want massive cuts in spending while Democrats want to raise taxes in addition to cutting spending, something which Republicans are not prepared to give up on. No one really knows what would happen if the U.S. defaults on its debt, but most are in the camp that the resulting actions would not be good. We could see yields blow out on U.S. debt, massive amounts of municipal defaults, as a large portion of municipal debt is tied to U.S. federal debt. Just this morning, news hit the wires that President Obama may hold debt ceiling talks at Camp David to try to get a deal done before the time line. The U.S. Treasury has said that a deal needs to be in place this week or next week at the latest for Congress to ratify the debt ceiling extension and make it law. ACTION ITEMS:

Bullish:
Traders who believe that QE3 is likely to come might want to consider the following trades:

• Going long names like Caterpillar CAT, gold miners such as Barrick Gold ABX and others could prove profitable if QE3 comes.

Bearish:
Traders who believe that QE3 is not likely may consider alternate positions:

• Going long the dollar, which is moving higher on Bernanke's comments this morning, could prove profitable, and traders may want to consider buying PowerShares DB US Dollar Index Bullish UUP.

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