It’s Official! Fed Ready for QE3

Federal Reserve Chairman Ben Bernanke confirmed the fears of investors on Wednesday when he testified to the House Financial Services Committee. No, he’s not shaving his beard nor is he gonna start wearing a toupee. He merely put QE3 back on the table and the markets went wild.

Yep! In case you missed seeing the Fed’s head honcho being grilled by politicians at Capitol Hill, Bernanke mentioned that the bank may not start tightening its monetary policy anytime soon. Heck, the Fed may even inject more stimulus to the economy if it feels that growth isn’t picking up as fast as it should.

As for interest rates, Bernanke hinted that we may not hear any hike until around 2012.

For the record though, he clarified that the recent slump in economic growth might only be temporary. If this is the case, the Fed wouldn’t need to employ further accommodative measures.

But wait! How could the central bank’s already loose monetary policy be any looser? Big Ben cited three options:

First, there’s the option of employing another round of quantitative easing a.k.a. the dreaded QE3.

Option number two could be the Fed being more explicit about how long it will keep interest rates on hold. Saying that it won’t hike rates for an “extended period” just won’t cut it anymore.

Lastly, the bank may also cut the 0.25% interest rate that it pays to banks as an incentive for keeping reserves. That way, banks will have another reason to lend more.

The market didn’t seem to care which method the central bank would employ because the moment that Fed head Bernanke confirmed that the central bank is open for further easing, the U.S. dollar sold off like crazy. The doji on the USDX daily chart that I pointed out yesterday worked like a charm, pushing the index much closer to the critical 75.00 level.

The other safe-haven currencies, namely the Swiss franc and the Japanese yen, took advantage of U.S. dollar weakness, too. In fact, the Swissy even reached a new record high against the Greenback! Commodities, particularly gold and oil, also benefited from this flight to safety. By the looks of it, the dollar seems to be losing its safe-haven appeal.

It didn’t help that the selloff was exacerbated by Moody’s decision to put the AAA rating of U.S. debt on downgrade watch. Talk about a double whammy on the dollar!

Aside from increased selling pressure on the Greenback, how else could the Fed’s openness to QE3 impact the future price action?

Remember that Bernanke also pointed out that the chances of pulling the trigger on QE3 is largely dependent on employment, consumer spending, and economic confidence. This implies that future economic reports from the U.S., specifically the NFP, retail sales, and consumer confidence data, will be watched very closely by the Fed. And if they’re keeping close tabs on those reports, you probably should too.

Also bear in mind that weak data would put the Fed even closer to implementing QE3 which would be negative for the U.S. dollar. This implies that the U.S. dollar could be driven by fundamentals, rather than risk sentiment, in the near term. Stay on your toes, as always!