Fed Must Soothe Market to Sustain Recovery

This post appeared Tuesday on RealMoney. Click here for a free trial, and enjoy incisive commentary all day, every day.

NEW YORK (TheStreet) -- We can clearly see from Tuesday's new bailouts of Royal Bank of Scotland (RBS Quote) and Lloyds (LYG Quote), who, together, received an additional $51 billion in bailout funds from the U.K. government, that there remain latent problems in the global financial system.

The half-billion-dollar loss posted by UBS (UBS Quote) Tuesday morning is a stark reminder, as well, that this global financial and economic recovery is uneven, at best.

My interpretation of gold's recent rebound is one of a flight to safety amid these financial surprises, not an inflation signal or a weak dollar play, as some would suggest.

If a falling dollar were the sole reason for the rally in gold, other commodities would mirror the better-than-$25 surge in gold, which they are not!

Easy Does It...

While I believe the U.S. is recovering more quickly and more robustly than most people realize, I also believe that the recovery is fragile, insofar as it still relies on a friendly Fed.

The Federal Reserve kicked off its two-day policy meeting at 9 a.m. Tuesday morning amid reports it is contemplating sending clearer signals about the timing and magnitude of its "exit strategy" to drain excess liquidity from the markets and economy and not re-inflate any bubbles in stocks, commodities or property prices.

We have seen higher rates in Israel, Australia and Norway in recent weeks and months predicated on that very notion. The "snugging up" of monetary policy, to use an older term, is designed to cool the asset inflation that is presumably rearing its ugly head in those countries and avoid a bout of generalized inflation farther down the economic road.

As many know, I believe these actions to be premature. I believe that the nascent return to normality, post-Lehman, is exactly what monetary and fiscal policies were intended to achieve and that withdrawing stimulus this early in the recovery is a risky proposition.