This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

The Fed's Jedi Mind Trick

Stocks in this article: ^DJI ^GSPC TLT JNK SPY QQQ DIA

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.

To understand the magnitude of the Fed's challenge, you must first ponder the following graph, which illustrates the enormous level of excess liquidity that has accumulated in the U.S. financial system and economy.

During the early phases of the recovery from the 2008 financial crisis, this unprecedented level of liquidity pumped into the system by Fed policies did not pose a problem, and was indeed helpful to the economy, as long as the demand for liquidity (liquidity preference) was high.

1 of 3

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • 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 Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,356.87 +288.00 1.69%
S&P 500 2,012.89 +40.15 2.04%
NASDAQ 4,644.3120 +96.4780 2.12%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs