Why Bernanke is Mum on QE3, Even As Economy Dips

The economy hasn’t looked so good recently.

The housing market is double dipping, corporate profits are starting to disappointment, and last Friday’s jobs report was beyond horrible. Meanwhile, the market has steadily decline since the beginning of May.

Investors are selling their risk assets because they’re uneasy about the economic slowdown, wary about the end of QE2 on June 30, and unsure if the economy can sustain itself in 2012 once government stimulus fades.

So why isn’t Federal Reserve Chairman Ben Bernanke talking about QE3? Why isn’t he saving the financial markets like he did late last year? Why isn’t this Great Depression guru doing something to prevent a possible double-dip?

The answer is multi-faceted. Deutsche Bank listed 8 reasons in a recent note (below are 7 of them):

1. The extent of the slowdown is poorly understood (it might not be so bad after all that)

2. Core inflation is on the rise (QE3 could therefore be construed as neglecting the mandate of price stability)

3. Interest rates are not a constraint to growth (QE3 won’t help the economy)

4. QE pushes the wrong buttons (like inflating asset bubbles and commodities prices)

5. Save the Fed’s bullets for fiscal consolidation (QE3 may be more useful when the federal government really pulls the plug on fiscal stimulus in the coming quarters)

6. Enlarging the balance sheet complicates the [Fed’s] eventual unwind even more

7. There are at least three increasingly vocal groups resistant to QE (US politicians, Fed hawks, and foreign countries like China)

The bottom line is that Bernanke and company aren’t ready for QE3, at least not immediately after the end of QE2 on June 30.

That’s largely irrelevant to the economy because QE’s effect on it is long past the point of diminishing returns. However, it’s still extremely potent for financial asset prices. Rolling out more QE will save the markets again, just like it did in late 2010. However, because it probably won’t happen, financial assets will likely continue to struggle in the near-term.