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No Need for QE3: Fed-Speak Enough to Keep Rates Low, Says Axel Merk

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St. Louis Federal Reserve President James Bullard says the Federal Reserve is at the ready to act if the economy falters and deflation looks to be a threat. "If the economy weakens substantially, and especially if the inflation picture starts to deteriorate so that deflation becomes a risk again, then I think the committee would definitely take action," Bullard told Japan's Nikkei newspaper, according to a Reuters report.

With Friday's Federal Reserve conference in Jackson Hole, Wyoming looming, the big question in the market remains: Will they or won't they go ahead with another round of quantitative easing?

In the most recent round of QE, the Fed bought more than $600 billion of Treasury bonds between November 2010 and June of this year. In the first round of QE between Dec. 2008 and March 2010 - the Fed bought $1.7 trillion of debt, mostly mortgage securities.

Axel Merk, founder of Merk Investments and manger of the Merk Hard Currency Fund, says not only is it unwise for the Fed to commit to another round of QE, it's also unnecessary. "The Federal Reserve has managed to move the markets with words rather than action," he says, citing the Fed's announcement on August 9 to keep rates exceptionally low through mid-2013 and the drop in interest rates along the yield curve that followed. "Short-term cost of borrowing has pretty much gone to zero," he notes. "That is something that previously only been done through the purchase of securities."

Whether or not there's more money printing to come Merk says the U.S. dollar will continue to be under pressure. "We believe Bernanke wants to have a weaker dollar to promote growth. And, the latest FOMC decision has moved in that direction."

Bullard's comments suggest the central bank is prepared to do even more, if need be. Stay tuned.