The Fed is in a bind. No matter which way it turns, utter failure is a risk. Putting more money into the system risks no less than the dollar itself. Stopping quantitative easing (QE) risks plunging the economy and financial system into another period of turbulent decline. It looks like they are going to choose the latter.
In a recent report, I made the case that pressure was building on the Fed to end its QE 2 program in June, and that if it did, there would be an enormous rout in the stock, bond, and commodity markets. That analysis still stands.
This new two-part report will analyze the many competing factors, both for and against, that will determine whether QE 2 really is the end of the Fed's efforts at printing up a recovery, or merely the event that precedes QE 3. The factors are numerous and polarized. On the one hand there are many signs of economic recovery - the very best that a few trillion can buy - and on the other hand there's $108/barrel oil and a deeply uncertain future for Japan over the next 3-12 months.
Fed Adopting Tougher Posture
Recently the Fed has trotted out several of its governors to make the case that they are serious about ending QE 2. Strangely, they chose Friday and Saturday to go on a publicity tour -- days of the week normally reserved for news that is being buried, not exposed.
I found the following news snippets odd, not just because of their Friday/Saturday timing, but because they are all versions of the story purporting that the Fed is "thinking about tightening."
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