Investors are betting huge amounts that Ben Bernanke is as good as his word.
Markets have been on a tear since the U.S. Federal Reserve chairman indicated at the end of August that he's open to another round of unconventional monetary stimulus, known as quantitative easing, should the U.S. economy remain in the doldrums. In reaction, U.S. stocks have had their best September since the Great Depression despite a sputtering economy.
If the mere hint of quantitative easing has had such impact, the real thing is likely to exert an even more powerful effect when the Fed, as is now widely expected, pulls the trigger on the policy action within the next month. "It's really a matter of when and not if," says Michael Hewson, a London-based analyst for CMC Markets.
Most market seers expect QE, as it's been dubbed for short, to power stocks to further gains and take some of the downside risk out of the market.
Mr. Bernanke's remarks in August spurred gains in most financial assets, and if the policy is implemented, it is expected to be bullish for gold, commodities and bonds, but bearish for the U.S. dollar.
The reason quantitative easing is such a powerful elixir for financial markets is that it amounts to a central bank running the printing presses. When it embarks on such easing, the Fed buys securities - typically longer dated U.S. Treasury bonds - and pays for them with money it creates essentially out of thin air.
This buying drives up government bond prices and lowers their yields, which move inversely to prices. As some of that freshly minted cash flows into other financial markets, it lifts other asset values as well.
"Markets will like it and the stock market will go up, bond yields will come down," predicts Martin Barnes, a managing editor at BCA Research, a Montreal-based economic forecasting firm.
The timing of the move is the biggest question. Some analysts say the Fed could act at any time, possibly as early as this week in reaction to any really weak economic numbers. Others expect it to stay on hold until after the U.S. midterm elections on Nov. 2, so it won't be accused to trying to influence the vote by goosing the stock market. The Fed concludes its next policy meeting on Nov. 3, suggesting a possible implementation early next month.
Quantitative easing does have a potential downside: taken to excess, it can cause inflation through the creation of all that new money. That's why central bankers only use it during difficult times, such as the Fed did in the financial turmoil following the Lehman Brothers collapse. That first round of easing involved the purchases of about $1.7- trillion (U.S.) and ended this year in March.
Another potential problem is that the creation of too many new dollars could make existing holders of the U.S. currency nervous about the future value of their money, triggering a flight out of the greenback. The dollar has been falling sharply since Mr. Bernanke's remarks in August, and over time, the negative factors of quantitative easing could cause any short-term market gains to evaporate.
"I think what he's doing is he's opening Pandora's box," says Mr. Hewson of the Fed chief. Mr. Hewson is skeptical about the long-term effects of quantitative easing, worrying that it's a sign that business conditions remain weak.
"At some point equities have to reflect the economic environment that they're trading in and if things are so bad that the Fed feels compelled to ease, then obviously economic conditions aren't good," he says.
Quantitative easing isn't expected to have a major impact on the U.S. economy, which is still suffering the aftermath of the credit bubble. Mr. Barnes thinks any easing may cut longer-term interest rates a quarter or a half percentage point, but that is likely to have only limited effect on the wider economy since rates are already very low - near zero for short-term borrowings.
John Williams, an economist who publishes Shadow Government Statistics, an analysis of trends in U.S. economic data, predicts quantitative easing will be great for gold, which he says has "significant upside" because of worries over dollar debasement and future inflation.
"I think the movement that you're seeing now is a general market anticipation that the Fed has no choice but to liquefy the system and start creating inflation," he says.