Odds for US Federal Reserve’s QE 3.0 now 99%!

Wow. Markets have already (nearly) fully factored in Team Ben Bernanke to implement QE 3.0.

From Bloomberg,

Just six months ago, money market traders expected the Federal Reserve to raise interest rates by the end of 2013. Now, they see borrowing costs staying at record lows for about three more years as the economic outlook worsens.

Bond market measures from overnight index swaps, which indicate no rise in the federal funds rate until mid-2015, to a 62 percent decline in a measure of volatility in government bonds signal that rates will stay near zero for longer. The gap between two- and five-year Treasury yields, which decreases when traders expect benchmark rates to remain subdued, is more than 50 percent narrower than its average since 2008.

Investor expectations for sluggish growth and low inflation remain intact even though the collapse of Lehman Brothers Holdings Inc., which triggered the worst financial crisis since the Great Depression, happened four years ago. While the economy expanded in the second quarter, the unemployment rate remained above 8 percent for the 43rd-straight month in August…

A gauge of indicators of market expectations for additional central bank stimulus rose to 99 percent in August, the highest ever, according to Citigroup Inc. The measure increased to 82 percent in the months before QE2 in November 2010.

Here is what I wrote earlier,

Mounting expectations and deepening dependence from central banking opiate, which has been clashing with the unfolding economic reality, will prompt for more price volatility on both directions. The Bank of America posits that QE 3.0 has been substantially priced in.

Eventually stock markets will either reflect on economic reality or that central bankers will have to relent to the market’s expectations. Otherwise fat tail risks may also become a harsh reality.

My guess is that Mr. Bernanke, like his ECB counterpart Mr. Draghi, will relent. Otherwise whatever gains accumulated of late may all go down the drain.

Besides, it seems Bernanke’s personal interest to see rising stock markets.