2013-01-16prudentbear.com

The way I see it, the Fed is now in a bit of a pickle.  With Bernanke's "it's all about jobs, jobs and jobs," the little fib justifying aggressive QE evolved more into a white lie.  Some Fed officials have been opposed to any additional QE.  Some were likely convinced by Bernanke over the summer/fall that the fragile global backdrop made aggressive monetary stimulus necessary.  But today, with global markets on fire, only the hard-core doves would likely believe massive ongoing QE is warranted.  Many would today likely see the risk of fueling asset Bubbles as overshadowing suspect QE benefits.

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It's safe to add the Fed's "pre-commitment" of $85bn monthly QE -- and tying such extreme accommodation to the unemployment rate -- as one more major policy error for the history books. The Fed's quandary is today compounded by its obfuscation and convoluted communications strategy.

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A mini "exit strategy" is definitely in order -- and it's been awhile since the markets had to fret about a reversal of Fed accommodation. And, importantly, the longer "risk on" spurs global market excesses -- the more pressing it will be for the Fed to act. Yet, ongoing "fiscal cliff" risks abound. Fed timidity raises the probabilities that an unleashed "risk on" finds an opening.


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