NEW YORK (TheStreet) -- The Federal Open Market Committee decision to modify the original QE3 plan not only gives the Fed much-needed flexibility managing the widely feared exit scenario but also provides stronger support in case things get worse.
But the market reaction Wednesday was even more significant. There was a brief risk-on rally, with Treasuries ( iShares Barclay's 20+ Yrs Treasury Bond ( TLT) ETF) down, and stocks ( SPDR S&P 500 ( SPY) ETF) and gold ( SPDR Gold Trust ( GLD) ETF -- which in its inflation-protection hat is a risk-on asset in the current context) up, that lasted for an hour.Then the market seemed to have forgotten about the Fed and went back to the corner, sulking in the gloom of the earlier ADP ( ADP) miss. Two things are very clear:
- 1. The excitement over the prospect of a (finally) strong and sustained recovery of the U.S. economy earlier in the year is gone. It's another case of green shoots that have sprouted and quickly died every spring since 2010.
- 2. The excitement over Fed quantitative easing is gone. Nobody's worried about inflation anymore. And this is not a vote of confidence in the Fed, otherwise stocks would go up and Treasuries down. Rather, it is a clear vote of no confidence in the Fed in the sense that the market believes the Fed can do little to help the economy.
Oh, and one more thing: Bernanke should admit total failure soon. The stronger wording in Wednesday's FOMC announcement calling for fiscal support is significant. It signals the increasing frustration from the Fed on the continuing lack of fiscal accommodation, e.g., more borrowing, to accompany the monetary accommodation. And herein, not Keynesian policies as often criticized in certain circles, lies the Fed's mistake. Keynesian economists have long proposed numerous variations of a helicopter dropping cash. And it would've been much more effective in stoking inflation than the pretentious, tedious QE. There's only one technical problem that Keynesians forget: the political will of the society in maintaining some semblance of social fairness prohibits such academically perfect solutions.
In other words, Americans want to avoid borrowing more from our children if we can help it. We actually want to be responsible in our own finances! Keynesians failed to understand this simple albeit irrational psyche. And because of this, they're doomed to fail in disgrace. And, speaking of the new BoJ, I was baffled by the talk of early exit from multiple Fed governors and the media earlier in the year. Even if one believed in the strong recovery story, wouldn't it have been premature for Fed governors to say things that would surely cause so much concern in the market? Now, in retrospect, I see such talks were clearly prompted by "Abenomics" (for Japan Prime Minister Shinzo Abe). The outright money-printing -- increasing base money instead of mere, timid QE -- by the new BoJ, as enthusiastically endorsed by Bernanke, has tremendously complicated and therefore eroded the Fed's control in inflation in the U.S. Whereas the Fed could supply liquidity with abandon before, knowing that inflation would be exported and become somebody else's problem, now the yen tsunami is coming ashore. With privileged early access to data, some Fed governors must have been alarmed by the new trend and became worried about the implication in inflation and Fed exit. The irony is bittersweet. As to the market, it's becoming increasingly clear that the worldwide economy is once again slowing down. Even in Japan, antagonists to the Abe approach are becoming more visible, as reported by Bloomberg. And Wednesday's market reaction, or rather lack thereof, to the FOMC shows unusual negative sentiment and apathy toward the Fed not seen since 2009. This could be a significant turning point.
In other words, Americans want to avoid borrowing more from our children if we can help it. We actually want to be responsible in our own finances! Keynesians failed to understand this simple albeit irrational psyche. And because of this, they're doomed to fail in disgrace. And, speaking of the new BoJ, I was baffled by the talk of early exit from multiple Fed governors and the media earlier in the year. Even if one believed in the strong recovery story, wouldn't it have been premature for Fed governors to say things that would surely cause so much concern in the market? Now, in retrospect, I see such talks were clearly prompted by "Abenomics" (for Japan Prime Minister Shinzo Abe). The outright money-printing -- increasing base money instead of mere, timid QE -- by the new BoJ, as enthusiastically endorsed by Bernanke, has tremendously complicated and therefore eroded the Fed's control in inflation in the U.S. Whereas the Fed could supply liquidity with abandon before, knowing that inflation would be exported and become somebody else's problem, now the yen tsunami is coming ashore. With privileged early access to data, some Fed governors must have been alarmed by the new trend and became worried about the implication in inflation and Fed exit. The irony is bittersweet. As to the market, it's becoming increasingly clear that the worldwide economy is once again slowing down. Even in Japan, antagonists to the Abe approach are becoming more visible, as reported by Bloomberg. And Wednesday's market reaction, or rather lack thereof, to the FOMC shows unusual negative sentiment and apathy toward the Fed not seen since 2009. This could be a significant turning point.
