The Fed's Jedi Mind Trick
NEW YORK ( TheStreet) -- The Fed understands that it must quickly wind down QE, lest the experiences of 2001 to 2007 be repeated. During this fateful period, the Fed maintained too much monetary accommodation for too long (2001-2003), and then failed to remove the excess liquidity from the economy in a timely fashion (2003-2007). The result was the formation of asset bubbles and relative price distortions, which ultimately led to devastation of the U.S. financial system and overall economy.
Still, cognizant of these risks, many Fed officials are also concerned that economic growth in the U.S. is very weak and vulnerable to reversal. These officials fear that removal of monetary accommodation could trigger instability in credit markets, which could in turn derail the weak recovery being experienced in the real economy.
What will the Fed do in the face of this dilemma? They have apparently decided that Jedi mind tricks are the answer. By confidently uttering things that are both suggestive and a bit mysterious, the Fed hopes that it can keep bond vigilantes bamboozled and stock bulls from running wild, while at the same time continuing to pump liquidity into the economy ostensibly to support the real economy.
Specifically, Fed officials hope that mere suggestions about tapering, combined with confident bragging about the Fed's ability to swiftly withdraw (or to accelerate) accommodation, if conditions warrant, will be sufficient to persuade investors not to bid down the price of fixed-income assets such as iShares Barclay's 20+ Year Treasury Bond (TLT) and SPDR Barclay's High Yield Bond (JNK) (thereby increasing their yields), despite growing signs that excess liquidity is igniting inflation in select sectors of asset and product markets.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV