September 29, 2011

Axel Merk: Fed’s Operation Twist Warm Up for QE3

Calls latest fed move ‘useless,’ predicts more easing to come later this year

A growing chorus of critics is questioning the efficacy of the Fed’s latest attempt to put downward pressure on long-term interest rates and “help make broader financial conditions more accommodative”—also known as Operation Twist.

Currency fund manager Axel Merk, president and CIO of Merk Investments, told the The Daily Ticker on Thursday that recent easing is flat out "useless," and believes it is meant to "set the stage" for a third round of quantitative easing later this year.

axel merk"He is just doing it much more slowly than many of us would have anticipated" in an effort to prime markets for additional money printing, Merk (left) said.

When asked for the reasoning behind his prediction, Merk said he believed Bernanke had yet to see the dollar fall as much as he would like; the Fed chairman can still use this one key tool to devalue the dollar even more to help spur exports. In Merk's view, according to The daily Ticker, “Bernanke will spend the next few months arguing that inflation remains low and that little harm would come from firing up the printing presses again.”

As the website notes, the dollar strengthened against the euro in the immediate aftermath of the Fed's policy announcement, but that trend has reversed this week in the face of possible action on Greece, and by extension, the European debt crisis as a whole.

However, Merk doesn’t believe the dollar’s rally has staying power. He’s betting the euro will make a comebackin the long term, because it is much more difficult for the European Central Bank to “ease monetary policy and spend and print money.”

"Yes, the U.S. dollar continues to be a safe haven, but if you look at past crises…every time there is a run to safety the U.S. dollar appears to be less of a beneficiary," Merk said. "We see this pendulum swinging and every time this pendulum swings back and forth less money sticks in the U.S."

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